TIDMSTB
RNS Number : 6917U
Secure Trust Bank PLC
30 March 2023
PRESS RELEASE
Thursday 30 March 2023
Embargoed release at 07:00 am
LEI: 213800CXIBLC2TMIGI76
SECURE TRUST BANK PLC
Preliminary Results for the 12 months to 31 December 2022
Significant Strategic Progress and Growth Momentum
Highlights(1)
-- 28.1% growth in profit before tax pre impairments to GBP76.1 million
-- Total profit before tax of GBP44.0 million (2021: GBP56.0 million)
-- 19.1% growth in lending balances to GBP2.9 billion
-- 500 basis point improvement in cost income ratio to 55.0%,
with further progress expected in FY23
-- Arrears remain stable at low levels in consumer divisions
-- Healthy regulatory capital base strengthened further
following GBP90 million Tier 2 bond issuance
Secure Trust Bank PLC ("STB" or the "Group"), a leading
specialist lender, is pleased to announce its financial results for
the year ended 31 December 2022, delivering 28.1% growth in
continuing(1) profit before tax pre impairments of GBP76.1 million
(2021: GBP59.4 million). This significant increase has been
delivered through a combination of strong loan book growth, careful
management of net interest margin and effective cost
management.
A strong set of results demonstrating the potential of the
Group's business model. The Group has been agile and responsive to
changing market conditions, achieving a 19.1% increase in lending
balances1 while restricting total operating cost growth to 4.3%.
New business lending of GBP2.1 billion (2021: GBP1.4 billion) was
at record levels, with the Group proactively tightening lending
criteria through the year. This robust performance and our
continued focus on managing risk exposures appropriately gives the
Group confidence in delivery of our medium-term targets.
The Group has continued to execute on its strategic priorities,
including the simplification of the business and focus on its
existing attractive market segments. These twin areas of focus have
delivered improved operational efficiency and strong growth in
operating income. The Group delivered annualised operational cost
improvements of GBP2.0 million in 2022 with further initiatives
anticipated in the year ahead. The combination of growth and tight
cost control resulted in a 500 basis points improvement in the
Group's cost income ratio to 55.0% (2021: 60.0%).
Including the profit on sale of the DMS loan portfolio of GBP6.1
million(2) total profit before tax was GBP44.0 million. As
previously communicated, the Group's profit before tax benefited
from impairment releases in 2021. Impairment charges normalised in
2022 and as a result, continuing(1) pre-tax profit reduced to
GBP39.0 million (2021: GBP55.9 million).
The Group announced on 28 February 2023 that it had raised
GBP90.0 million of new Tier 2 Subordinated Notes and repurchased
GBP25.0 million of existing Notes, with the remaining GBP25.0
million of existing notes repurchased on 20 March 2023. With an
enlarged regulatory capital base, the Group is strongly positioned
to deliver further loan book growth and scale the business.
The Group will recommend a final dividend of 29.1 pence per
share, making a total 2022 dividend of 45.1 pence per share,
meeting the Group commitment to return 25% of earnings to
shareholders.
Financial summary
2022 2021 Change %
------------------------------------------------- ----------- ----------- --------
Total profit before tax GBP44.0m GBP56.0m (21.4)
------------------------------------------------- ----------- ----------- --------
Continuing profit before tax GBP39.0m GBP55.9m (30.2)
------------------------------------------------- ----------- ----------- --------
Continuing profit before tax and pre impairments GBP76.1m GBP59.4m 28.1
------------------------------------------------- ----------- ----------- --------
Total basic earnings per share 180.5 pence 244.7 pence (26.2)
------------------------------------------------- ----------- ----------- --------
Continuing basic earnings per share 158.5 pence 244.1 pence (35.1)
------------------------------------------------- ----------- ----------- --------
Ordinary dividend per share 45.1 pence 61.1 pence (26.2)
------------------------------------------------- ----------- ----------- --------
Total return on average equity 10.7% 15.9% (5.2)pp
------------------------------------------------- ----------- ----------- --------
Cost of funds 1.9% 1.2% 0.7pp
------------------------------------------------- ----------- ----------- --------
Net interest margin 5.7% 6.1% (0.4)pp
------------------------------------------------- ----------- ----------- --------
Cost of risk 1.4% 0.2% 1.2pp
------------------------------------------------- ----------- ----------- --------
Cost income ratio 55.0% 60.0% (5.0)pp
------------------------------------------------- ----------- ----------- --------
Total lending balances(3) GBP2,919.5m GBP2,531.9m 15.3
------------------------------------------------- ----------- ----------- --------
Continuing lending balances GBP2,919.5m GBP2,451.0m 19.1
------------------------------------------------- ----------- ----------- --------
Customer deposits GBP2,514.6m GBP2,103.2m 19.6
------------------------------------------------- ----------- ----------- --------
Common Equity Tier 1 ("CET 1") ratio 14.0% 14.5% (0.5)pp
------------------------------------------------- ----------- ----------- --------
Total capital ratio 16.2% 16.8% (0.6)pp
------------------------------------------------- ----------- ----------- --------
Other highlights
-- New business lending volumes increased by 43.5% to GBP2,067.8
million (2021: GBP1,441.1 million).
-- Consumer Finance lending balances grew by 38.9% to GBP1,427.6
million (2021: GBP1,028.1 million), driven primarily by growth in
lower risk, prime interest free products through strong retailer
partnerships in Retail Finance and the successful launch of new
products within Vehicle Finance in 2021.
-- Retail Finance market share increased to 11.4%(4) (2021:
8.4%) of the retail store and online credit market.
-- Vehicle Finance market share(4) increased to 1.1%(5) (2021:
0.7%) as new product launches build volumes.
-- Business Finance lending balances grew by 4.8% to GBP1,491.9
million (2021: GBP1,422.9 million), driven by higher asset-backed
lending utilisation levels in Commercial Finance. Real Estate
Finance had positive lending growth in H1 2022, however, overall
growth for the year was 0.5% due to interest rate volatility
experienced in H2 2022 impacting demand.
-- Customer deposits grew to GBP2,514.6 million (2021:
GBP2,103.2 million) with a move towards fixed term funds. Bank of
England Base Rate increases were passed on to managed rate
products, resulting in a cost of funds of 1.9% (2021: 1.2%). Our
deposit base is made up of retail customers and 95% of total
deposits are fully covered by FSCS.
-- Implementation of a cost efficiency programme, including digitalisation, property portfolio consolidation, operating model changes and sourcing and supplier management reviews which delivered annualised savings of GBP2.0 million in 2022.
-- Enhanced customer experience in Retail Finance through open
banking technology implementation.
-- Customer satisfaction remains high, as measured by Feefo: 4.6 stars (2021: 4.6 stars)
-- Listed as an official UK Best Workplace(TM) for the fourth
year running, ranking 29 out of 67 companies.
-- New Environmental, Social and Governance ("ESG") strategy
launched formalising STB's existing initiatives, and creating
additional priorities across environment, social and
governance.
Outlook
The Group has made good progress on its strategy of focusing on
its core markets where it has depth of expertise and opportunity to
grow, in enhancing customer experience and in leveraging its
distribution network. The Group continues to invest in new products
and consider strategic acquisitions to complement our four core
businesses. With a diversified and resilient business model,
agility and strong capital and liquidity positions the Group is
well placed to weather uncertain market conditions and deliver its
medium-term targets and sustainable long-term growth.
The Group continues to trade in line with management
expectations. The strong loan book growth delivered by Retail
Finance during 2022 has continued so far in 2023 and growth
opportunities remain significant. The strategic repositioning of
both Retail Finance and Vehicle Finance in recent years has meant
credit quality remains good, with arrears rates remaining at low
levels to date. The pipeline of new business opportunities in Real
Estate Finance has started to increase again. The Group will
deliver further cost efficiency measures in 2023, building on the
excellent cost control achieved in 2022. STB is confident of
delivering another strong performance in FY 2023, despite the
uncertain economic and market conditions.
Lord Forsyth, Chairman, said:
"With strong loan book growth, active management of net interest
margin in a rising rate environment and excellent cost control the
team delivered impressive results and gained market share. With a
strengthened capital position, I remain confident that the Group is
well placed to meet its strategic objectives and to face the future
with confidence."
David McCreadie, Chief Executive, said:
"I am delighted with our positive operational performance and
strong cost discipline during the year. The Group has grown lending
balances prudently, having tightened credit criteria through the
year, and has delivered significant operational efficiency
improvements. Our diversified business model allows us to be
flexible and agile, a key asset during this period of economic
uncertainty. Our strategic pillars of grow, sustain and care are
fully embedded as we look to optimise for growth in the years
ahead.
"With significant growth potential in our attractive, specialist
lending markets we are well placed to realise our ambitions. We
will continue to consider potential merger and acquisition
opportunities which can complement our core markets. We remain
confident about the future as we make further progress towards our
medium-term targets."
Medium-term targets 2022 Target
---------------------------------------- ----- ---------
Net interest margin 5.7% >5.5%
---------------------------------------- ----- ---------
Cost income ratio 55.0% <50%
---------------------------------------- ----- ---------
Total return on average equity 10.7% 14% - 16%
---------------------------------------- ----- ---------
Common Equity Tier 1 ("CET 1") ratio 14.0% >12.0%
---------------------------------------- ----- ---------
Compound Annual Growth Rate ("CAGR")(6) 15.6% >15.0%
---------------------------------------- ----- ---------
Footnotes:
1. Performance metrics presented below relate to continuing
operations unless otherwise stated. For further details see the
Appendix to the Annual Report and Accounts.
2. Includes selling costs of GBP1.2 million, and GBP2.8 million
of associated costs to wind down the Debt Management business. See
Note 10 to the Financial Statements for further details.
3. 31 December 2021 includes GBP1.3 million of assets held for
sale.
4. Source: Finance & Leasing Association ('FLA'): New
business values within retail store and online credit: 2022: FLA
total and Retail Finance new business of GBP9,844 million (2021:
GBP9,146 million) and GBP1,124.3 million (2021: GBP771.5 million)
respectively.
5. Source: FLA. Cars bought on finance by consumers through the
point of sale: New business values: Used cars: 2022, FLA total and
Vehicle Finance total of GBP23,472 million (2021: GBP19,838
million) and GBP262.9 million (2021: GBP134.3 million)
respectively.
6. CAGR is the annual growth rate calculated as the annualised
compound growth in continuing loans and advances to customers since
31 December 2020.
Results presentation
This announcement together with the associated investors'
presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Secure Trust Bank will host a webcast for analysts and investors
today, 30 March 2023 at 10.00am, which can be accessed by
registering at:
https://stream.brrmedia.co.uk/broadcast/63b7e8bdd908a85f58e0d6ae
For those wishing to ask a question, please dial into the event
by conference call:
Dial +44 (0)330 551 0200
Confirmation code: Secure
Enquiries:
Secure Trust Bank PLC
David McCreadie, Chief Executive Officer
Rachel Lawrence, Chief Financial Officer
Phil Clark, Investor Relations
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Akshman Ori
Tom Marsh
Nicholas Harland
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Emma Gabriel
Harry Rees
Tel: 020 7523 8000
Teneo Communications
Tom Murray
Misha Bayliss
Tel: 020 7353 4200
This announcement contains inside information This announcement
contains inside information for the purposes of Article 7 of the
Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK
domestic law by virtue of the European Union (Withdrawal) Act
2018.
The person responsible for the release of this information on
behalf of STB is Mark Stevens, Company Secretary.
Forward looking statements
This announcement contains forward looking statements about the
business, strategy and plans of STB and its current objectives,
targets and expectations relating to its future financial condition
and performance. Statements that are not historical facts,
including statements about STB's or management's beliefs and
expectations, are forward looking statements. By their nature,
forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur
in the future. STB's actual future results may differ materially
from the results expressed or implied in these forward looking
statements as a result of a variety of factors. These include UK
domestic and global economic and business conditions, risks
concerning borrower credit quality, market related risks including
interest rate risk, inherent risks regarding market conditions and
similar contingencies outside STB's control, the COVID-19 pandemic,
expected credit losses in certain scenarios involving forward
looking data, any adverse experience in inherent operational risks,
any unexpected developments in regulation, or regulatory and other
factors. The forward looking statements contained in this
announcement are made as of the date of this announcement, and
(except as required by law or regulation) STB undertakes no
obligation to update any of its forward looking statements.
Key performance indicators
The following key performance indicators are the primary
measures used by management to assess the performance of the
Group.
Certain key performance indicators represent alternative
performance measures that are not defined or specified under
International Financial Reporting Standards ('IFRS'). Definitions
of the financial key performance indicators, their calculation
and
an explanation of the reasons for their use can be found in the
Appendix to the 2022 Annual Report and Accounts on pages 182 to
184.
Key performance indicators have been presented in the Financial
review on a continuing basis, unless otherwise stated.
Continuing businesses include the Retail Finance, Vehicle
Finance, Real Estate Finance and Commercial Finance businesses
only. Discontinued businesses include the Debt Management, Consumer
Mortgages and Asset Finance businesses. As a result, certain ratios
have been restated on a 'continuing' basis. Further details on
discontinued businesses can be found in Note 10 to the Financial
Statements.
Further explanation of the financial key performance indicators
is discussed in the narrative of the Financial review on pages 12
to 17 of the 2022 Annual Report and Accounts, where they are
identified by being in bold font.
Further explanation of the non-financial key performance
indicators is provided in the Managing our business responsibly
(pages 37 to 49 of the 2022 Annual Report and Accounts) and
Climate-related financial disclosures (pages 50 to 59 of the 2022
Annual Report and Accounts) sections.
The Directors' Remuneration Report, starting on page 80 of the
2022 Annual Report and Accounts, sets out how executive pay is
linked to the assessment of key financial and non-financial
performance indicators.
2022 2021 2020
------------------------------------------------------- ------- ------- -------
Grow
------------------------------------------------------- ------- ------- -------
Loans and advances to customers (GBPmillion) 2,919.5 2,451.0 2,184.9
------------------------------------------------------- ------- ------- -------
Why we measure this: Shows the growth in the Group's lending balances,
which generate income
----------------------------------------------------------------------------------
Compound annual growth rate from December 2020
(%) 15.6 12.2 N/A
------------------------------------------------------- ------- ------- -------
Why we measure this: Shows the rate of growth in the Group's lending
balances
----------------------------------------------------------------------------------
Core net interest margin (%) 5.7 6.1 6.1
------------------------------------------------------- ------- ------- -------
Why we measure this: Shows the interest margin earned on the Group's
lending balances, net of funding costs
----------------------------------------------------------------------------------
Total return on average equity (%) 10.7 15.9 5.9
------------------------------------------------------- ------- ------- -------
Why we measure this: Measures the Group's ability to generate profit
from the equity available to it
----------------------------------------------------------------------------------
Sustain
------------------------------------------------------- ------- ------- -------
Cost to income ratio (%) 55.0 60.0 56.6
------------------------------------------------------- ------- ------- -------
Why we measure this: Measures how efficiently the Group uses its cost
base to produce income
----------------------------------------------------------------------------------
Common Equity Tier 1 ('CET 1') ratio (%) 14.0 14.5 14.0
------------------------------------------------------- ------- ------- -------
Why we measure this: The CET 1 ratio demonstrates the Group's capital
strength
----------------------------------------------------------------------------------
Cost of risk (%) 1.4 0.2 2.0
------------------------------------------------------- ------- ------- -------
Why we measure this: Measures how effectively the Group manages the credit
risk of its lending portfolios
----------------------------------------------------------------------------------
Care
------------------------------------------------------- ------- ------- -------
Customer Feefo ratings (Stars)
(mark out of 5 based on star rating from 990 reviews,
2021:937, 2020:1,466) 4.6 4.6 4.7
------------------------------------------------------- ------- ------- -------
Why we measure this: Indicator of customer satisfaction with the Group's
products and services
----------------------------------------------------------------------------------
Employee survey trust index score (%)
(based on all employee survey) 85.0 80.0 82.0
------------------------------------------------------- ------- ------- -------
Why we measure this: Indicator of employee engagement and satisfaction
----------------------------------------------------------------------------------
Environmental intensity indicator
(total Scope 1, 2 and certain Scope 3 emissions
per GBPmillion Group operating income -see page
56 of the Annual Report and Accounts for further
details) 2.8 3.0 3.1
------------------------------------------------------- ------- ------- -------
Why we measure this: Indicator of the Group's impact on the environment
----------------------------------------------------------------------------------
Chairman's statement
New lending in our businesses reached record levels despite us
tightening lending criteria and improving the credit quality of new
business. The simplification of the Group to focus on markets where
we have specialist skills was completed with the sale of the Debt
Managers (Services) Limited's loan portfolio.
Of course, 2022 profits were always going to be impacted by the
normalisation of impairment charges. However, strong loan book
growth, active management of net interest margin in a rising rate
environment and excellent cost control have delivered an impressive
total profit before tax of GBP44.0 million (2021: GBP56.0 million)
and continuing profit before tax of GBP39.0 million (2021: GBP55.9
million). As a result, the Board are proposing a final dividend for
2022 of 29.1 pence. This brings the total dividend for the year to
45.1 pence and meets our commitment to return 25% of earnings to
shareholders.
A new environmental, social and governance ('ESG') policy has
been approved by the Board to meet our climate change targets and
ESG has been integrated into our overall strategy.
I am particularly proud that we have been ranked 25 among 79
Large organisations named as the UK's Best Workplaces(TM) for
Wellbeing in 2023. In December we were awarded the Silver Talent
Inclusion and Diversity Evaluation Mark for the second year running
by the Employers Network for Equality and Inclusion.
I am pleased that we were successful in issuing GBP90.0 million
of Tier 2 capital in February 2023. This new capital enables
refinancing of the 2018 Tier 2 capital, and supports our growth
ambitions. Further information can be found in Note 47 to the
Financial Statements.
These are challenging times and our success could not have been
achieved without a first-class leadership team and the dedication
and creativity of our employees. On behalf of the Board I would
like to express our thanks and appreciation to all of them.
Thanks are due to the Board too. An external effectiveness
evaluation concluded they have the necessary skills and are
carrying out their duties well. Lucy Neville-Rolfe stepped down in
September to join the Government and I am most grateful for her
contribution over the last four years.
We are all acutely aware of the headwinds facing the UK economy
and the consequences for consumers and businesses. The energy bills
crisis, high rates of inflation, tightened monetary policy, rising
interest rates, political turmoil and the heart-breaking conflict
in Ukraine have created significant uncertainty. However, our
business model is robust and demonstrated throughout the COVID-19
pandemic that it is sufficiently agile to adapt to changing
economic conditions. We are active in exploring merger and
acquisition opportunities that could complement our businesses and
believe that the Group is well placed to meet its strategic
objectives and to face the future with confidence.
Lord Forsyth
Chairman
Chief Executive's statement
We delivered a strong performance in 2022, with significant
growth in continuing profit before tax pre impairments, record new
business and loan book growth, and disciplined cost control. We
continued to provide customers with excellent service and our
capital position remains very healthy.
A key strategic objective has been to simplify our business
model. We delivered another important part of this strategy in
March 2022, with the announcement of our exit from the debt
purchase market. The sale of Debt Managers (Services) Limited's
('DMS') loan portfolio was completed in May 2022, with the
migration of the portfolio completed in November 2022. The sale
generated a profit of GBP6.1 million(1) , which includes selling
costs and some closure costs. We expect to incur further costs over
the next couple of years as we fully wind down the business. I
would like to extend my appreciation and thanks to all colleagues
who supported the transfer of the loan portfolio to the purchaser.
By exiting this loss-making business, we reset our medium-term
market guidance for net interest margin to be >5.5% and cost
income ratio to be <50%. Given the change in Group structure
following the disposal of non-core assets, all commentary in my
report refers to the continuing operations of the Group unless
otherwise stated. Further information on discontinued operations
can be found in Note 10 to the Financial Statements.
A second area of strategic focus has been on capturing a greater
share of prime customers in our Consumer Finance businesses. Within
Retail Finance, our loan book has shifted more towards low-risk
interest free credit propositions and at the year-end arrears were
at historically low levels. Within Vehicle Finance, we have had
good success with the Personal Contract Purchase and Hire Purchase
products that were launched for prime customers during 2021, and
which combined accounted for 24.2% (2021: 5.3%) of the Vehicle
Finance loan book at 31 December 2022. At year-end, Vehicle Finance
arrears were in line with pre-pandemic levels.
Loan book growth was particularly strong in the first half of
2022 as we benefited from the recovery post pandemic and from our
strategic move in recent years to expand our addressable market and
our distribution. We took proactive steps in the second half of the
year, as the economic outlook deteriorated, to manage effectively
the risk for both our business and our customers which had the
desired effect of slowing the rate of loan book growth.
Medium-term targets
------------------------------------------------ ------
Total return on average equity 14-16%
------------------------------------------------ ------
Cost income ratio <50%
------------------------------------------------ ------
Common equity tier 1 ratio >12%
------------------------------------------------ ------
Net interest margin >5.5%
------------------------------------------------ ------
Compound annual growth rate of the lending book 15%+
------------------------------------------------ ------
We delivered record new business lending across our Consumer
Finance and Business Finance businesses, achieving volumes of
GBP2,067.8 million (2021: GBP1,441.1 million). We achieved 11.4%
(2021: 8.4%)(2) market share in new business lending for Retail
Finance and 1.1% (2021: 0.7%)(3) for Vehicle Finance. This
contributed to net lending growth of 19.1% (2021: 12.2%) and drove
a significant increase in operating income.
The higher interest rate backdrop has contributed to higher
funding costs for new and existing deposits as we re-priced managed
rate savings products several times in the year, offering
attractive rates to customers whilst maintaining a sufficient level
of funding. The savings market remains competitive, and our product
mix shifted towards fixed-term products, as customer behaviour
evolved
as interest rates rose. Variable rate lending portfolios within
our Business Finance businesses reflected changes in Base Rate
immediately. Whereas, for our fixed rate lending portfolios,
funding cost increases were passed on through new business price
increases, which take a short time to crystallise into pricing and
the income statement, as pipeline cases complete and introducer
arrangements are reset. Combined, this generated a net interest
margin of 5.7% (2021: 6.1%).
I am pleased with our management of costs during a period of
high inflation. We have worked hard to identify opportunities to
remove and avoid costs. The delivery of our strategic priority to
simplify the Group has allowed us to improve our operational
efficiency. This enabled us to reduce our cost income ratio by 500
basis points to 55.0% (2021: 60.0%).
The combination of strong loan book growth, well managed net
interest margin and excellent cost control delivered significant
growth in profit before tax pre impairments of GBP76.1 million, an
increase of GBP16.7 million (2021: GBP59.4 million). We saw the
cost of risk return to pre-pandemic levels to 1.4% (2022: 0.2%) and
this resulted in profit before tax of GBP39.0 million (2021:
GBP55.9 million). Total profit before tax was GBP44.0 million
(2021: GBP56.0 million).
In February 2023 we issued GBP90.0 million of subordinated debt,
which qualifies as Tier 2 regulatory capital. At the same time we
repurchased GBP25.0 million of our existing 2018 Tier 2
subordinated debt, and we repurchased the remaining GBP25.0 million
in March 2023. We are pleased with the support we have received
from new and existing investors for the new issuance. With an
enlarged and optimised capital base we are strongly positioned to
continue to help consumers and businesses to fulfil their
ambitions.
Vision and purpose
We shared our refreshed strategy at the end of 2021, where we
announced a renewed focus on our core markets where we have depth
of expertise and specialist skills, through our three strategic
pillars of grow, sustain and care. This is now fully embedded
across our organisation as we look to optimise for growth and make
further progress towards our medium-term targets. As noted above we
have further simplified the Group with the sale of the DMS loan
portfolio. We have made progress against our strategic objectives,
and medium-term targets, notably on lending book growth and cost
income ratio. Further details are presented on page 11 of the 2022
Annual Report and Accounts. This strongly supports our vision to
become the UK's most trusted specialist lender.
As we look to the future, in May 2022 we completed the purchase
of AppToPay Ltd, which will provide the proprietary technology
platform to enable the Retail Finance business to enter the digital
'Buy Now Pay Later' market with a fully regulated product in 2023.
As with all our lending decisions we will undertake affordability
and credit assessments. We are excited about entering this new
market, but we will do this cautiously during these uncertain
times. We will also continue to consider potential merger and
acquisition opportunities that can complement and leverage our
businesses and take advantage of our existing well-established
distribution networks of retailers, dealerships and intermediary
relationships.
Helping our customers
We understand these are challenging times for many of our
customers, with the high level of inflation and the cost of living
crisis. Helping our customers achieve their ambitions requires us
to support them through these uncertain times. We do this through
our digital channels and contact centres for the Consumer Finance
businesses and relationship managers for the Business Finance
businesses. We have long established relationships with more than
1,500 retailers as part of the Retail Finance business, and now
work with over 560 dealers, brokers or internet introducers in the
Vehicle Finance business. We continue to work to maintain our
effective working relationships, using our expertise to make sure
our products continue to meet the needs of our customers.
We routinely review the customer experience across our
businesses, particularly enhancing our digital offering and
customer journey. In a key achievement towards the end of 2022, we
partnered with Mastercard to launch a new payment method within the
Retail Finance business. This uses open banking technology,
offering seamless and fast account to account payments made via a
customer's current account banking app, without the need for
customers to provide their debit card details. The uptake has been
positive, with more customers than expected using this easy option
to make one off and early repayments. We look forward to embracing
this development and technology across other businesses during
2023. We have also launched a project to introduce a mobile app for
our Savings products in 2023.
We were recognised for several awards for our customer service
and products during the year. Most notably, we achieved the
Customer Service Excellence Standard for the tenth year running, as
well as awards from Feefo and Moneyfacts. Feefo awarded us the
Platinum Trusted Service award for Vehicle Finance and Retail
Finance. This is awarded to those companies who have achieved the
Gold service award for three consecutive years, and recognises our
consistent support for customers during a challenging period. Feefo
scores continue to rate highly at 4.6 stars out of 5 (2021: 4.6
stars out of 5). In addition, Moneyfacts awarded us 'Best Notice
Account Provider'. We also achieved 'Highly Commended' recognition
in four categories at the Savings Champion Awards in December
2022.
Operational efficiency
We launched a programme as part of the refreshed strategy in
2021, which sought to look at where we can operate more effectively
across the Group. Alongside the improvement in payment experience
noted above, we have looked at internal technology, digitalisation,
operational processes and sourcing and supplier management to
enable us to operate as efficiently as possible across all our
operational sites, and this programme has delivered tangible
benefits. Alongside this, we have listened to our Savings customers
and considered the environmental impact of customer correspondence.
This has enabled us to transition 89% of our customers to use
internet banking to access their statements, and all certificates
of interest are now provided via this method.
Having adopted a hybrid working model, we then reviewed our
property portfolio considering the new ways of working. As a
consequence, in the second half of 2022, we reduced from two sites
to one at our Retail Finance site in Cardiff, and plan to do the
same at the head office site in Solihull during the first half of
2023.
As we have simplified the Group and reduced the number of
businesses we are in, we have taken the opportunity to review
leadership structures, roles and spans of control, and delivered
further cost savings.
Our people
Last year I announced several new senior appointments. I am
pleased to say the team is working well together and focused on
delivering our strategic objectives. Having simplified the business
further, and due to a number of retirements, five members of the
senior management team left the Group in 2022. I would like to
thank those colleagues for their support and wish them well for the
future. Julian Hartley joined the Executive Committee in October
2022 as Managing Director, Vehicle Finance and Savings, further
broadening the experience of the leadership team. Geoff Ray,
Managing Director, Real Estate Finance joined our Executive
Committee in January 2023. Geoff has been with us for over six
years.
We had some wonderful achievements during the year. In 2022, we
were listed as an official UK's Best Workplaces(TM) for the fourth
year running. We were ranked 29 out of 67 companies and we have now
been awarded a trio of accolades from Great Place to Work(R): UK's
Best Workplaces(TM), UK's Best Workplaces(TM) for Women and more
recently for UK's Best Workplaces(TM) for Wellbeing.
Our Your Voice employee survey showed us that 89% (2021: 80%) of
those who took part in the survey are proud to work here, and we
also achieved a Trust Index of 85% (2021: 80%), the highest we have
achieved in an annual survey since we started partnering with Great
Place to Work(R) and on par with the UK's Best Workplaces(TM). I am
also pleased to say we have signed up to HM Treasury's Women in
Finance Charter which underlines our commitment to equality,
diversity and inclusion.
We understand that as well as our customers, our colleagues may
be facing financial challenges. We took the decision to award a
one-off payment in October 2022 to colleagues who earn GBP35,000
annually or less, which acknowledges the impact of the cost of
living crisis on our lower level earners. We also introduced a
range of resources and information on financial wellbeing for all
our colleagues during the year.
We continue to support employee wellbeing and provide all
employees with a 'wellbeing hour' each month, and in 2022 we
established a menopause policy along with awareness sessions and
provided 'everyday allyship' training for all managers.
I would like to thank all our colleagues for their continued
hard work and commitment to the Group.
Outlook
2022 has been a year of significant progress for the Group. We
remain vigilant, adapting to the evolving economic environment. Our
size and expertise provide us the agility to do so, and our track
record has demonstrated our resilience through previous periods of
uncertainty. We will do this while continuing to help consumers and
businesses fulfil their ambitions. We have made good progress
against our medium-term objectives; I am confident that we will
make further progress in the year ahead and that we are well placed
for the future.
David McCreadie
Chief Executive Officer
1. Includes selling costs of GBP1.2 million, and GBP2.8 million
of associated costs to wind down the Debt Management business. See
Note 10 to the Financial Statements for further details.
2. Source: Finance & Leasing Association ('FLA'): New
business values within retail store and online credit: 2022: FLA
total and Retail Finance new business of GBP9,844 million (2021:
GBP9,146 million) and GBP1,124.3 million (2021: GBP771.5 million)
respectively.
3. Source: FLA. Cars bought on finance by consumers through the
point of sale: New business values: Used cars: 2022, FLA total and
Vehicle Finance total of GBP23,472 million (2021: GBP19,838
million) and GBP262.9 million (2021: GBP134.3 million)
respectively.
Strategic priorities
Grow
How will it be delivered
-- Generate growth and attractive returns in specialist segments.
-- Exploit digital capabilities to build scale and drive cost efficiency.
Progress we are making
-- Consumer and Business Finance achieved a total return on
average equity of 10.7%, with a 19.1% annual growth in the loan
book during 2022, and compound annual growth measured from 31
December 2020 of 15.6%, reflecting growth across all our
divisions.
-- Traction gained with new products in Vehicle Finance through
the new prime Hire Purchase and Personal Contract Purchase products
which are targeted at lower credit risk customers. Prime lending
now makes up 24.2% (2021: 5.3%) of the Vehicle Finance loan
book.
-- Delivered first phases of our cost and operational efficiency
programme which comprised sourcing and supplier management,
technology optimisation, organisational design and people, and
reducing the Group's property footprint, resulting in a cost income
ratio of 55.0% (2021: 60.0%).
-- Non-core loan book of Debt Managers (Services) Limited was
sold during the year; and we completed the acquisition of AppToPay
Ltd, which will provide the technology for Retail Finance to enter
the digital Buy Now Pay Later sector.
Targets and future priorities
-- Maintain growth in the lending balance sheet, targeting in
the medium-term 15%+ compound annual growth in appropriate market
conditions, whilst maintaining return on average equity of 14%-16%
through scaling our specialist businesses.
-- Widen our distribution and addressable markets, both through
new products in Consumer Finance.
-- Continue the cost and operational efficiency journey to achieve a <50% cost income ratio.
-- Build-out our existing digital capabilities to win share and
drive scale, including transitioning legacy products to new
scalable platforms.
-- Exploit merger and acquisition opportunities that complement
our existing businesses and leverage costs, systems and market
expertise.
Sustain
How will it be delivered
-- Create sustainable value through market expertise and deep customer knowledge.
-- Utilise strong credit discipline, capital allocation and risk management capabilities.
Progress we are making
-- Achieved a net interest margin of 5.7% (2021:6.1%), whilst
operating in a challenging rising rate environment.
-- Capital was deployed to support growth in loans and advances
to customers, resulting in a common equity tier 1 ('CET 1') ratio
of 14.0% (2021: 14.5%).
-- Manage credit scorecard cut-offs and affordability thresholds
to improve quality of credit in a challenging market
environment.
-- Ongoing investment in regulatory compliance, finance
automation and financial crime prevention.
Targets and future priorities
-- Continue to build on experienced specialist teams, deep
expertise and knowledge to deliver sustainable value growth,
ensuring a proactive approach to product design and pricing in a
rising interest rate environment to maintain a net interest margin
in excess of 5.5%.
-- Manage the mix and risk profile of the business to maintain the CET 1 ratio above 12%.
-- Drive sustainable scale and growth whilst maintaining credit
discipline, risk management and optimising our capital
allocation.
-- Provide products relevant to the external market and customers.
Care
How will it be delivered
-- Help customers with simple, clear and compelling products.
-- Deliver consistently excellent customer care and swift outcomes.
Progress we are making
-- Continued investment in digital platforms, allowing dealers
and retailers to integrate seamlessly, as well as continued growth
of online engagement and self-service, with enhancements across all
our businesses.
-- Strong customer satisfaction and advocacy across all areas of
the Group as evidenced by independent customer review ratings, and
recognition from third parties such as Feefo, Moneyfacts and
Customer Service Excellence.
-- Launched a Board approved environmental, social and
governance ('ESG') strategy (for further details see pages 37 to 39
of the 2022 Annual Report and Accounts).
-- Appointed a Board member as our Consumer Duty Champion, and
approved our plan for compliance with the regulation.
Targets and future priorities
-- Increase customer self-service through digital capabilities,
including a Savings proposition delivering native mobile apps,
biometric authentication for enhanced security and enabling
confirmation of payee to improve customer safety and
satisfaction.
-- Develop new products, including Buy Now Pay Later and Near
Prime PCP, as well as seizing opportunities presented by emerging
green markets, such as the Greener Homes Scheme, and consumer and
retailer demand for finance on environmentally friendly products
and services.
-- Embedding the ESG strategy, which includes the further
progression of an Equality, Diversity and Inclusion strategy.
-- Implement our Consumer Duty plan.
Financial review
Income statement
2022 2021 Movement
Continuing operations GBPmillion GBPmillion %
--------------------------------------------------------- ------------ ----------- ----------
Interest income and similar income 203.0 163.9 23.9
--------------------------------------------------------- ------------ ----------- ----------
Interest expense and similar charges (50.4) (27.7) 81.9
--------------------------------------------------------- ------------ ----------- ----------
Net interest income 152.6 136.2 12.0
--------------------------------------------------------- ------------ ----------- ----------
Fee and commission income 17.4 13.3 30.8
--------------------------------------------------------- ------------ ----------- ----------
Fee and commission expense (0.4) (0.6) (33.3)
--------------------------------------------------------- ------------ ----------- ----------
Net fee and commission income 17.0 12.7 33.9
--------------------------------------------------------- ------------ ----------- ----------
Operating income 169.6 148.9 13.9
--------------------------------------------------------- ------------ ----------- ----------
Net impairment charge on loans and advances to customers (38.2) (5.0) 664.0
--------------------------------------------------------- ------------ ----------- ----------
Gains on modification of financial assets 1.1 1.5 (26.7)
--------------------------------------------------------- ------------ ----------- ----------
Fair value losses on financial instruments (0.3) (0.1) 200.0
--------------------------------------------------------- ------------ ----------- ----------
Operating expenses (93.2) (89.4) 4.3
--------------------------------------------------------- ------------ ----------- ----------
Profit before income tax from continuing operations 39.0 55.9 (30.2)
--------------------------------------------------------- ------------ ----------- ----------
Income tax expense (9.4) (10.4) (9.6)
--------------------------------------------------------- ------------ ----------- ----------
Profit for the year from continuing operations 29.6 45.5 (34.9)
--------------------------------------------------------- ------------ ----------- ----------
Discontinued operations
--------------------------------------------------------- ------------ ----------- ----------
Profit before income tax from discontinued operations 5.0 0.1 4,900.0
--------------------------------------------------------- ------------ ----------- ----------
Income tax expense (0.9)- -
--------------------------------------------------------- ------------ ---------- ----------
Profit for the period from discontinued operations 4.1 0.1 4,000.0
--------------------------------------------------------- ------------ ----------- ----------
Profit for the year 33.7 45.6 (26.1)
--------------------------------------------------------- ------------ ----------- ----------
Basic earnings per share (pence) - Total 180.5 244.7 (26.2)
--------------------------------------------------------- ------------ ----------- ----------
Basic earnings per share (pence) - Continuing 158.5 244.1 (35.1)
--------------------------------------------------------- ------------ ----------- ----------
Selected key performance indicators and performance
metrics
--------------------------------------------------------- ------------ ----------- ----------
Total profit before tax 44.0 56.0 (21.4)
--------------------------------------------------------- ------------ ----------- ----------
Percentage
point
%% movement
--------------------------------------------------------- ------------ ---------- ----------
Net interest margin 5.7 6.1 (0.4)
--------------------------------------------------------- ------------ ----------- ----------
Cost of funds 1.9 1.2 0.7
--------------------------------------------------------- ------------ ----------- ----------
Cost to income ratio 55.0 60.0 (5.0)
--------------------------------------------------------- ------------ ----------- ----------
Cost of risk 1.4 0.2 1.2
--------------------------------------------------------- ------------ ----------- ----------
Total return on average equity 10.7 15.9 (5.2)
--------------------------------------------------------- ------------ ----------- ----------
Common Equity Tier 1 ('CET 1') ratio 14.0 14.5 (0.5)
--------------------------------------------------------- ------------ ----------- ----------
Total capital ratio 16.2 16.8 (0.6)
--------------------------------------------------------- ------------ ----------- ----------
Certain key performance indicators and performance metrics
represent alternative performance measures that are not defined or
specified under International Financial Reporting Standards
('IFRS'). Definitions of these alternative performance measures,
their calculation and an explanation of the reasons for their use
can be found in the Appendix to the 2022 Annual Report and Accounts
on pages 182 to 184. In the narrative of this review, key
performance indicators are identified by being in bold font.
Key performance indicators and performance metrics have been
presented in this review on a continuing basis, unless otherwise
stated.
Continuing businesses include the Retail Finance, Vehicle
Finance, Real Estate Finance and Commercial Finance businesses
only. It excludes the Debt Management, Consumer Mortgages and Asset
Finance businesses. The associated loan portfolios for these
businesses were sold in 2022 or 2021. As a result, certain ratios
for 2021 have been restated on a 'continuing' basis. Further
details of continuing businesses can be found in the Appendix to
the 2022 Annual Report and Accounts on page 182. The Directors'
Remuneration Report, starting on page 80 of the 2022 Annual Report
and Accounts, sets out how executive pay is linked to the
assessment of key financial and non-financial performance
metrics.
2022 was another strong year for the Group, with good progress
against our medium-term financial targets. The Group successfully
navigated the uncertain macroeconomic environment and delivered
healthy loan book growth of 19.1% (2021: 12.2%) while at the same
time shifting our Consumer Finance business towards better quality
prime business. Net interest margin was well managed against this
lower yielding book and profit before tax pre impairments was
significantly increased due to loan book growth and disciplined
cost control. Our capital position remains healthy, with a CET 1
ratio of 14.0% (2021: 14.5%) well ahead of our medium-term target
and our total return on average equity was 10.7% (2021: 15.9%).
The Group achieved a profit before tax of GBP39.0 million (2021:
GBP55.9 million). Although this was a reduction of 30.2% on 2021 as
a result of normalisation of impairment charges, profit before tax
pre impairments of GBP76.1 million was 28.1% higher (2021: GBP59.4
million) reflecting record growth in net lending balances and
disciplined cost management.
In addition, the Group benefited from the recognition of the
profit on disposal of the Debt Managers (Services) Limited ('DMS')
loan portfolio of GBP6.1 million in the year and at a total level
the profit before tax was GBP44.0 million (2021: GBP56.0
million).
Total earnings per share decreased from 244.7 pence per share to
180.5 pence per share, and on a continuing basis earnings per share
decreased from 244.1 pence per share to 158.5 pence per share.
Total return on average equity decreased from 15.9% to 10.7%.
Earnings per share and return on average equity performance were
impacted by the normalisation of impairment charges. Detailed
disclosures of earnings per ordinary share are shown in Note 11 to
the Financial Statements. The components of the Group's profit are
analysed in more detail in the sections below.
Operating income
The Group's operating income increased by 13.9% to GBP169.6
million (2021: GBP148.9 million).
Net interest income on the Group's lending assets continues to
be the largest component of operating income. This increased by
12.0% to GBP152.6 million (2021: GBP136.2 million), driven by
growth in net lending assets, with average balances increasing by
20.5% to GBP2,699.3 million (2021: GBP2,240.5 million).
The Group's net interest margin decreased to 5.7% (2021: 6.1%),
reflecting the increased interest rate environment and the
continued shift towards lower yielding but better quality prime
interest free lending in Retail Finance as well as the reduction in
higher yielding development loans in Real Estate Finance.
The Group's other income, which relates to net fee and
commission income, increased by 33.9% to GBP17.0 million (2021:
GBP12.7 million), predominately driven by an increase in overall
net lending assets.
Impairment charges
Impairment charges increased to GBP38.2 million (2021: GBP5.0
million), reflecting a return to a normalised level of impairment
charge following releases of COVID-19 driven provisions in 2021,
and delivering a cost of risk of 1.4% (2021: 0.2%), which is
comparable to pre-COVID level of 1.7% in 2019. Overall impairment
provisions remain robust at GBP78.0 million (2021: GBP60.2 million)
with the aggregate coverage level at 2.6% (2021: 2.4%) for
continuing loan books.
During the year the Group enhanced its IFRS 9 process by
engaging external economic advisors to inform our macroeconomic
variables model assumption inputs. During the fourth quarter of the
financial year, the Group refreshed these macroeconomic inputs
incorporating a weaker UK economic outlook. The forecast economic
assumptions within each IFRS 9 scenario, and the weighting applied,
are set out in more detail in Note 17.1 to the Financial
Statements.
The Group has applied Expert Credit Judgements ('ECJ's') where
management believes the IFRS 9 modelled output is not accurately
reflecting current risks in the loan portfolios. Further details of
these ECJs are included in Note 17 to the Financial Statements.
Operating expenses
The Group's cost base increased in the year by 4.3% to GBP93.2
million (2021: GBP89.4 million), with an improvement in the cost to
income ratio of 500 basis points to 55.0% (2021: 60.0%).
Included within costs were GBP1.2 million relating to
non-recurring corporate projects (2021: GBPnil), which if excluded
would have reduced the cost income ratio to 54.2%, an underlying
improvement of 580bps.
The improvement in the ratio reflects both the increase in
operating income and the ongoing programme of initiatives which
seek to achieve more efficient and effective operational processes,
including digitisation of processes, supplier and procurement
reviews, organisational design and property management.
Taxation
The effective statutory tax rate has increased to 24.1% (2021:
18.6%). The effective rate for 2022 has increased above the
Corporation Tax rate of 19% due to a reduction to deferred tax
asset values which are linked to the expected levels of future tax
relief based on enacted rates, mainly arising from changes to the
banking surcharge enacted in 2022. Further details can be found in
Note 9 to the Financial Statements.
Discontinued businesses
In May 2022, the Group disposed of the loan portfolio of DMS,
realising an overall initial profit on disposal of GBP6.1 million.
Further wind-down costs are expected to be incurred over the next
couple of years. DMS continued to operate as a servicer for the
purchaser whilst the loan book was migrated to its operating
platform, which concluded in November 2022. During 2021 the Group
disposed of the Asset Finance and Consumer Mortgage portfolios.
Further details of the impact of these businesses are provided in
Notes 3 and 10 to the Financial Statements.
Distributions to shareholders
The Board recommend the payment of a final dividend for 2022 of
29.1 pence per share which, together with the interim dividend of
16.0 pence per share, represents a total dividend for the year of
45.1 pence per share (2021: 61.1 pence per share). This is in line
with the Group's policy to pay total annual dividends representing
25% of annual earnings.
Summarised balance sheet
2022 2021
GBPmillion GBPmillion
--------------------------------------------------- ----------- ------------
Assets
--------------------------------------------------- ----------- ------------
Cash and Bank of England reserve account 370.1 235.7
--------------------------------------------------- ----------- ------------
Loans and advances to banks 50.5 50.3
--------------------------------------------------- ----------- ------------
Debt securities - 25.0
--------------------------------------------------- ----------- ------------
Loans and advances to customers - continuing 2,919.5 2,451.0
--------------------------------------------------- ----------- ------------
Loans and advances to customers - discontinued (1) - 80.9
--------------------------------------------------- ----------- ------------
Fair value adjustment for portfolio hedged risk (32.0) (3.5)
--------------------------------------------------- ----------- ------------
Derivative financial instruments 34.9 3.8
--------------------------------------------------- ----------- ------------
Other assets 37.3 42.7
--------------------------------------------------- ----------- ------------
3,380.3 2,885.9
--------------------------------------------------- ----------- ------------
Liabilities
--------------------------------------------------- ----------- ------------
Due to banks 400.5 390.8
--------------------------------------------------- ----------- ------------
Deposits from customers 2,514.6 2,103.2
--------------------------------------------------- ----------- ------------
Fair value adjustment for portfolio hedged risk (23.0) (5.3)
--------------------------------------------------- ----------- ------------
Derivative financial instruments 26.7 6.2
--------------------------------------------------- ----------- ------------
Tier 2 subordinated liabilities 51.1 50.9
--------------------------------------------------- ----------- ------------
Other liabilities 83.5 37.7
--------------------------------------------------- ----------- ------------
3,053.4 2,583.5
--------------------------------------------------- ----------- ------------
1. 2021 includes a loan portfolio classified as Assets held for
sale of GBP1.3 million.
New business
Loan originations in the year, being the total of new loans and
advances to customers entered into during the period, increased by
43.5% to GBP2,067.8 million (2021: GBP1,441.1 million). Further
detail on the divisional split of this new business can be found in
the Business reviews on pages 18 to 21 of the 2022 Annual Report
and Accounts.
Customer lending and deposits
Group lending assets increased by 19.1% to GBP2,919.5 million
(2021: GBP2,451.0 million) primarily driven by strong growth in our
Consumer Finance business.
Consumer Finance balances grew by GBP399.5 million or 38.9%,
driven by strong demand in the first half of 2022 (21.5% growth)
and a slightly slower growth rate in the second half of 2022 (17.4%
growth), as the effects of us proactively tightening credit
criteria due to the macroeconomic environment made an impact.
Further analysis of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books,
is provided in Notes 15, 16, 17 and 39 to the Financial
Statements.
Customer deposits include Fixed term bonds, ISAs, Notice and
Access accounts. Customer deposits increased by 19.6% to GBP2,514.6
million (2021: GBP2,103.2 million). Total funding ratio of 112.5%
increased marginally (2021: 112.4%). As set out on page 17 of the
2022 Annual Report and Accounts, the mix of the deposit book has
continued to change as the Group has adapted to the recent Base
Rate changes, with a focus on retaining stable funds, which is
reflected in the increase in fixed term bonds.
Investments and wholesale funding
As at the end of 2022 the Group held no debt securities (2021:
GBP25.0 million). Amounts due to banks consisted primarily of
drawings from the Bank of England Term Funding Scheme with
additional incentives for SMEs ('TFSME') facility.
Tier 2 subordinated liabilities
Tier 2 subordinated liabilities represent two GBP25.0 million
tranches of 6.75% Fixed Rate Callable Subordinated Notes ('2018
Notes'), including interest accrued. Further details of the note
issuances are provided in Note 32. The Notes qualify as Tier 2
capital.
In February 2023 we issued GBP90.0 million of 10.5 year 13.0%
Fixed Rate Callable Subordinated Notes, which qualify as Tier 2
regulatory capital. Our existing 2018 Notes were repurchased in
February and March 2023. For further details see Note 47.1 to the
Financial Statements.
Capital
Management of capital
Our capital management policy is focused on optimising
shareholder value over the long-term. Capital is allocated to
achieve targeted risk adjusted returns whilst ensuring appropriate
surpluses are held above the minimum regulatory requirements.
Key factors influencing the management of capital include:
-- The level of buffers and the capital requirement set by the
Prudential Regulation Authority ('PRA');
-- Estimated credit losses calculated using IFRS 9 methodology,
and the applicable transitional rules;
-- New business volumes; and
-- The product mix of new business.
Capital resources
Capital resources increased over 2021 from GBP350.6 million to
GBP377.3 million. This includes the proposed 2022 final dividend of
GBP5.4 million. The increase was primarily due to CET 1 capital and
was driven by retained earnings growth, offset by the impact of
changes to the IFRS 9 adjustment as set out below.
2022 2021
Capital GBPmillion GBPmillion
------------------------ ----------- ------------
CET 1 capital 327.4 303.6
------------------------ ----------- ------------
Eligible Tier 2 capital 49.9 47.0
------------------------ ----------- ------------
Total capital 377.3 350.6
------------------------ ----------- ------------
Total risk exposure 2,335.0 2,087.4
------------------------ ----------- ------------
2022 2021
Capital ratios % %
------------------------ ----------- ------------
CET 1 ratio 14.0% 14.5
------------------------ ----------- ------------
Total capital ratio 16.2% 16.8
------------------------ ----------- ------------
Leverage ratio 10.7% 10.3
------------------------ ----------- ------------
The Group has elected to adopt the IFRS 9 transitional rules.
For 2022, this allows for 25% (2021: 50%) of the initial IFRS 9
transition adjustment, net of attributable deferred tax, to be
added back to eligible capital. The same relief is allowed for
increases in provisions between 1 January 2018 to 31 December 2019,
except where these provisions relate to defaulted accounts. The
same relief is also allowed for increases in provisions since 1
January 2020, this is applied at 75% in 2022 (2021: 100%). All
transitional relief will taper off by 31 December 2024.
The Group's regulatory capital is divided into:
-- CET 1 capital, which comprises shareholders' funds, after
adding back the IFRS 9 transition adjustments and deducting
qualifying intangible assets, both of which are net of attributable
deferred tax.
-- Tier 2 capital, which is solely subordinated debt net of
unamortised issue costs, capped at 25% of total Pillar 1 and Pillar
2A requirements.
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to the Group's on and off
balance sheet exposures. The weightings applied are those
stipulated in the UK Capital Requirements Regulation.
Excluding the impact of the IFRS 9 transitional rules, the
Group's CET 1 ratio and total capital ratio would reduce to 13.6%
and 15.7% respectively.
Capital requirements
The Total Capital Requirement, set by the PRA, includes both the
calculated requirement derived using the standardised approach and
the additional capital derived in conjunction with the Internal
Capital Adequacy Assessment Process ('ICAAP'). In addition, capital
is held to cover generic buffers set at a macroeconomic level by
the PRA.
2022 2021
GBPmillion GBPmillion
---------------------------- ----------- ------------
Total Capital Requirement 210.2 196.7
---------------------------- ----------- ------------
Capital conservation buffer 58.4 51.9
---------------------------- ----------- ------------
Countercyclical buffer 23.4 -
---------------------------- ----------- ------------
Total 292.0 248.6
---------------------------- ----------- ------------
The increase in lending balances through the year resulted in an
increase in risk weighted assets over 2022, bringing the total risk
exposure up from GBP2,087.4 million to GBP2,335.0 million.
The capital conservation buffer has been held at 2.5% of total
risk exposure since 1 January 2019. The countercyclical capital
buffer was 0% throughout 2021 as part of the PRA's response to
COVID-19. However this increased to 1% on 13 December 2022
alongside the removal of firm specific temporary PRA buffers. The
Financial Policy Committee have announced that the countercyclical
capital buffer will increase to 2% on 5 July 2023. For more
information please see page 24 of the 2022 Annual Report and
Accounts.
Liquidity
Liquidity resources
We continued to hold significant surplus liquidity over the
minimum requirements throughout 2022, managing liquidity by holding
High Quality Liquid Assets ('HQLA') and utilising predominantly
retail funding balances from customer deposits over 2022. Liquidity
remained high at the end of the period primarily due to prefunding
Real Estate Finance lending in January 2023. Total liquid assets
increased to GBP416.9 million as at 31 December 2022 (2021:
GBP306.7 million).
The Group is a participant in the Bank of England's Sterling
Money Market Operations under the Sterling Monetary Framework and
has drawn GBP390.0 million under the TFSME. The Group has no liquid
asset exposures outside of the United Kingdom and no amounts that
are either past due or impaired.
2022 2021
Liquid assets GBPmillion GBPmillion
-------------- ----------- ------------
Aaa - Aa3 370.1 259.0
-------------- ----------- ------------
A1 - A2 41.6 42.6
-------------- ----------- ------------
Unrated 5.2 5.1
-------------- ----------- ------------
416.9 306.7
-------------- ----------- ------------
We continue to attract customer deposits to support balance
sheet growth. Although we have continued to focus on attracting ISA
account funding, we have increased acquisition levels of fixed term
bonds which are a more stable form of funding. The composition of
customer deposits is shown in the table below.
2022 2021
Customer deposits % %
------------------ ---- ------
Fixed term bonds 56 46
------------------ ---- ------
Notice accounts 20 37
------------------ ---- ------
ISA 17 12
------------------ ---- ------
Access accounts 7 5
------------------ ---- ------
100 100
------------------ ---- ------
Management of liquidity
The Group uses various measures to manage liquidity. These
include:
-- The Overall Liquidity Adequacy Requirement ('OLAR'), which is
the Board's view of the Group's liquidity needs as set out in the
Board approved Internal Liquidity Adequacy Assessment Process
('ILAAP').
-- The Liquidity Coverage Ratio ('LCR'), which is a regulatory
measure that assesses net 30-day cash outflows as a proportion of
HQLA.
-- Total funding ratio, as defined in the Appendix to the Annual Report.
-- High Quality Liquid Assets ('HQLA') are held in the Bank of
England Reserve Account and UK Treasury Bills. For LCR purposes the
HQLA excludes UK Treasury Bills which are encumbered to provide
collateral as part of the Group's TFSME drawings with the Bank of
England.
The Group met the LCR minimum threshold throughout the year and
the Group's average LCR was 270.1% (based on a rolling 12 month-end
average).
Business review - Consumer Finance
Retail Finance
We provide quick and easy finance options at point of
purchase:
-- Helping consumers purchase lifestyle goods and services without having to wait.
-- Supporting the growth of UK retailers by offering integrated
finance options which drive sales.
2022 2021 Movement Movement
GBPmillion GBPmillion GBPmillion %
------------------ ----------- ------------ ----------- ---------
New business 1,124.3 771.5 352.8 45.7
------------------ ----------- ------------ ----------- ---------
Lending balance 1,054.5 764.8 289.7 37.9
------------------ ----------- ------------ ----------- ---------
Total revenue 78.0 67.7 10.3 15.2
------------------ ----------- ------------ ----------- ---------
Impairment charge 14.8 5.0 9.8 196.0
------------------ ----------- ------------ ----------- ---------
What we do
-- We operate a market leading online e-commerce service to
retailers, providing unsecured, prime lending products to UK
customers to facilitate the purchase of a wide range of consumer
products including bicycles, music, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and football
season tickets. These markets include a large number of household
names.
-- The finance products are either interest bearing or have
promotional interest free credit subsidised by retailers. For
interest free products, the customer pays the same price for the
goods regardless of whether credit is taken or not. Taking the
credit option allows the customer to spread the cost of the main
purchase into more manageable monthly payments, and afford
ancillary extras and add-ons, which can also be financed. Interest
free attracts a large proportion of high credit quality
customers.
-- The online processing system allows customers to sign their
credit agreements digitally, thereby speeding up the pay-out
process, and removing the need to handle sensitive personal
documents.
-- The business is supported by a highly experienced senior team and workforce.
2022 performance
Strong lending growth during 2022 of 37.9% (2021: 16.2%),
resulting from an increase in our market share of the retail store
and online credit market (1) .
-- Extension of our footprint with key retail partners as well
as the introduction of new retailer relationships as we leveraged
our strong track record of systems integration.
-- Lending and revenue growth has come mainly from interest free
lending into the furniture and jewellery sectors, which attracts a
prime customer at a lower credit risk but a lower net interest
margin. At the end of the year, 85.1% (2021: 80.2%) of the lending
book related to interest free lending.
-- We have consciously focused on primer sectors in response to
the deteriorating economic environment. As a result, impairment
charges have benefited from the improved credit quality of the
book, with cost of risk reducing to nearly half of the pre-pandemic
levels.
-- We anticipate further lending growth from our existing retail
partners and our operational plans are focused on digitalising all
key processes to improve the customer and retail partners
experience.
-- The acquisition of AppToPay will provide an additional
regulated product in the new digital Buy Now Pay Later markets
using mobile application-based technology.
1. Source: Finance & Leasing Association ('FLA'): New
business values within retail store and online credit: 2022: 11.4%
(2021: 8.4%): FLA total and Retail Finance new business of GBP9,844
million (2021: GBP9,146 million) and GBP1,124.3 million (2021:
GBP771.5 million) respectively.
Vehicle Finance
We help to drive more business in UK
car dealerships:
-- Providing funds to customers to help them buy used vehicles
from dealers via Vehicle Finance.
-- Providing funds to dealers to help them buy vehicles for
their forecourts and showrooms via Stock funding.
2022 2021 Movement Movement
GBPmillion GBPmillion GBPmillion %
------------------ ----------- ------------ ----------- ---------
New business 401.7 199.8 201.9 101.1
------------------ ----------- ------------ ----------- ---------
Lending balance 373.1 263.3 109.8 41.7
------------------ ----------- ------------ ----------- ---------
Total revenue 48.0 39.3 8.7 22.1
------------------ ----------- ------------ ----------- ---------
Impairment charge 21.3 0.1 21.2 21,200.0
------------------ ----------- ------------ ----------- ---------
What we do
-- We provide lending products which are secured against the
vehicle being financed. The majority of vehicles financed are used
cars sold by independent dealers.
-- We also provide vehicle stock funding whereby funds are
advanced and secured against dealer forecourt used car stock;
sourced from auctions, part exchanges or trade sources.
-- Finance is provided via technology platforms allowing Vehicle
Finance to receive applications online from its introducers;
provide an automated decision; facilitate document production
through to pay-out to dealer; and manage in-life loan accounts.
2022 performance
-- Proactively tightened lending criteria several times during
the year to manage the credit quality of new business written.
-- Continued lending growth, with our market share increasing to
1.1%1 (2021: 0.7%). During 2022, the market for used cars bought on
point-of-sale finance was 7.6% higher than in 20212. The amount of
finance advanced increased by significantly more over the same
period, up 18.3%, to GBP23.5 billion1, reflecting the increase in
used vehicle values.
-- New Prime Hire Purchase and PCP offering, launched in 2021,
delivered GBP83.4 million and GBP10.6 million of new lending
respectively during 2022, which now represents 24.2% (2021: 5.3%)
of the lending book.
-- Lending book growth exceeded revenue growth due to the
increased mix of higher credit quality, lower net interest margin,
prime business. New business growth exceeded lending growth due to
the short-term duration of Stock Funding.
-- 2021 impairment charges were driven by a release in
provisions arising from more benign macroeconomic conditions, as
anticipated, this was not repeated in 2022 with a return to more
normalised impairment provisions.
-- As part of the continuing Motor Transformation Programme, in
2022 we successfully delivered the first phase of the new
collections platform for the near prime portfolio. Phase 2 of this
programme will incorporate the prime portfolio and develop
integrations with our third-party suppliers in 2023.
1. Source: FLA. Cars bought on finance by consumers through the
point of sale: New business values: Used cars: 2022, FLA total and
Vehicle Finance total of GBP23,472 million (2021: GBP19,838
million) and GBP262.9 million (2021: GBP134.3 million)
respectively.
2. Source: FLA. Cars bought on finance by consumers through the
point of sale: New business number of used cars.
Business review - Business Finance
Real Estate Finance
We lend money against residential properties to professional
landlords and property developers:
-- Providing mortgage-style borrowing to professional landlords
to allow them to improve and grow their portfolio.
-- Providing development facilities to property developers and
SME house builders to help build new homes for sale or letting.
2022 2021 Movement Movement
GBPmillion GBPmillion GBPmillion %
------------------ ----------- ------------ ----------- --------
New business 384.5 376.1 8.4 2.2
------------------ ----------- ------------ ----------- --------
Lending balance 1,115.5 1,109.6 5.9 0.5
------------------ ----------- ------------ ----------- --------
Total revenue 57.7 54.8 2.9 5.3
------------------ ----------- ------------ ----------- --------
Impairment charge 1.3 0.1 1.2 1,200.0
------------------ ----------- ------------ ----------- --------
What we do
-- We provide lending secured against property assets to a
maximum 70% loan-to-value ratio, on fixed or variable rates over a
term of up to five years.
-- Finance opportunities are sourced and supported on a
relationship basis directly and via introducers and brokers.
-- We have an experienced specialist team, with many years of
property expertise, who are nimble and responsive within the
market.
-- We maintain a strong risk management framework for existing and prospective customers.
2022 performance
-- Growth in total revenue and lending balances during a
challenging trading year. Revenues were higher reflecting growth in
average lending balances, increases in interest rates and one-off
fees offset by a lower mix of development lending.
-- On the back of a strong first half of the year, new business
lending hit a record level. The interest rate volatility in the
second half of the year restricted lending growth as both borrowers
and lenders became more cautious. Whilst new business slowed in the
second half, early loan repayments also reduced, and we focused on
continuing to support our customers.
-- As at year end 85.0% of the loan book provided lending for
residential investment financing, which included GBP144.6 million
of our Greener Homes Scheme loans, which support borrowers to meet
the UK's clean growth strategy by 2035.
-- Collateralised loan book with an average loan-to-value of
57.7% (2021: 56.0%), reducing the level of inherent risk to credit
losses.
-- During the year electronic documentation execution was
implemented to improve the customer experience as well as reduce
costs.
Commercial Finance
We support the growth of UK businesses by enabling effective
cash flow:
-- Providing working capital finance to UK SMEs.
-- Providing funds for strategic events.
2022 2021 Movement Movement
GBPmillion GBPmillion GBPmillion %
--------------------------- ----------- ------------ ----------- --------
New business 157.3 93.7 63.6 67.9
--------------------------- ----------- ------------ ----------- --------
Lending balance 376.4 313.3 63.1 20.1
--------------------------- ----------- ------------ ----------- --------
Total revenue 29.3 17.4 11.9 68.4
--------------------------- ----------- ------------ ----------- --------
Impairment charge/(credit) 0.8 (0.2) 1.0 (500.0)
--------------------------- ----------- ------------ ----------- --------
What we do
-- Our lending remains predominantly against receivables,
typically releasing funds against 90% of qualifying invoices under
invoice discounting facilities. Other assets can also be funded
either long or short-term and across a range of loan-to-value
ratios alongside these facilities.
-- We also provided additional lending to existing customers
through the Government guaranteed Coronavirus Business Interruption
Loan ('CBIL') Scheme, Coronavirus Large Business Interruption Loan
('CLBIL') Scheme and Recovery Loan Scheme ('RLS').
-- Business is sourced and supported both directly and via
professional introducers, but is not reliant on the broker
market.
-- The Commercial Finance team has a strong reputation across
the Asset Based Lending market. The experienced specialist team
works effectively with its partners across private equity and tier
1 and 2 accountancy practices.
2022 performance
-- Strong growth in revenue and lending balances in 2022
reflects the contribution of new clients onboarded and low client
attrition across both 2021 and 2022, as well as the increases in UK
Base Rate throughout the year.
-- The Group continues to administer UK Government CBIL, CLBILS
and RLS and was accredited by the British Business Bank to offer
the RLS Phase 3 product. At 31 December 2022, the outstanding
lending balances under these schemes totalled GBP28.9 million
(2021: GBP42.9 million) against the original total lending under
the various schemes of c.GBP58 million. Commercial Finance took the
conscious decision not to participate in the UK Government's Bounce
Bank Loan Scheme, which closed in March 2021.
-- The decline in economic activity, rising inflation and cost
pressures are adding financial stress across our customers and this
is recognised by a modest increase in impairments this year.
-- In 2022, the business implemented a new client relationship
management system to improve customer service and drive operational
efficiency.
Business review - Savings
Customers trust us to look after their savings and provide a
competitive return:
-- Helping our customers save for special events such as a holiday, wedding or retirement.
-- Helping our lending businesses fund their product sets to
enable them to lend in the market we compete in.
2022 2021 Movement Movement
GBPmillion GBPmillion GBPmillion %
----------------- ----------- ------------ ----------- --------
Fixed term bonds 1,414.0 974.6 439.4 45.1
----------------- ----------- ------------ ----------- --------
Notice accounts 500.7 771.9 (271.2) (35.1)
----------------- ----------- ------------ ----------- --------
ISAs 421.8 255.0 166.8 65.4
----------------- ----------- ------------ ----------- --------
Access accounts 178.1 101.7 76.4 75.1
----------------- ----------- ------------ ----------- --------
2,514.6 2,103.2 411.4 19.6
----------------- ----------- ------------ ----------- --------
What we do
-- We offer a range of savings accounts that are purposely
simple in design, with a choice of products from easy access to
180-day notice, and six month to seven year fixed terms across both
bonds and ISAs.
-- Accounts are made available and priced in line with our
ongoing funding needs, allowing each individual to hold a maximum
balance of GBP1 million.
-- Our range of savings products enables us to access the
majority of the UK personal savings markets and compete for
significant liquidity pools, achieving a lower marginal cost with
the volume, mix and the competitive rates offered; optimised to the
demand of our funding needs.
2022 performance
-- 2022 saw increases in the Bank of England Base rate, which in
turn impacted the rates offered within the savings market,
increasing the Group's cost of funds.
-- The 2022 savings market was considerably more dynamic in
terms of product pricing than recent years, during which we raised
over GBP1.6 billion of new deposits.
-- The increasing attractiveness of fixed rate markets during
2022 drove customer preference for shorter-dated fixed term
deposits.
-- Further diversification of our product range saw the
introduction of our Access account to new and existing customers in
April, expanding our ability to raise deposits in this segment of
the savings market. Access accounts were also a popular customer
choice in 2022 given the elevated rate environment. However, the
Notice account product has become less attractive due to the strong
rates offered on fixed rate bonds and access accounts in the
market.
-- At the end of 2022, we widened our range of Fixed Term
products to include six and nine month bonds, to address the demand
for very short term products. This supports smoothing of our
maturity profile and monthly deposit raising over time. In
addition, we also saw a continued growth of ISA balances.
-- Savings have continued to deliver improvements to the
customer experience during the year. Enhancements to our online
application processes improved the customer journey at account
opening, through utilising group capability to verify customer
details.
-- Adoption of Confirmation of Payee services for validating
customers' nominated accounts was completed at the end of 2022,
reducing the need for customers to send supporting documentation as
part of the application process. We plan to use this as
the base to introduce the service for inbound payments during H1
2023, requested by customers funding new accounts during the
year.
-- Suitable customers were advised our primary channel of
communication would move to digital. Over 89% of customers have
adopted this approach, and statements and interest certificates
moved to being available through our online banking platform during
2022. Further opportunities to reduce paper throughout our account
processes will be reviewed in 2023.
-- 2023 will also see the enhancement of our digital proposition
with the launch of a mobile app.
Market review
The Group operates exclusively within the UK and its performance
is influenced by the macroeconomic environment in the UK. As the
Group's revenue is derived almost entirely from customers operating
in the UK, the Group is particularly exposed to the condition of
the UK economy. Customers' borrowing demands are variously
influenced by, among other things, UK property markets, employment
levels, inflation, interest rates, and customer confidence. The
economy affects demand for the Group's products, margins that can
be earned on lending assets and the levels of loan impairment
provisions.
As a financial services firm, the Group is subject to extensive
and comprehensive regulation by governmental and regulatory bodies
in the UK. The Group conducts its business subject to ongoing
regulation by the Financial Conduct Authority ('FCA') and the
Prudential Regulation Authority ('PRA'). The Group must comply with
the regulatory regime across many aspects of its activity,
including the training, authorisation and supervision of personnel,
systems, processes and documentation.
Economic review
Economic growth as measured in UK Gross Domestic Product ('GDP')
slowed in the second half of the year with zero growth in GDP
recorded in the three months to December 2022. Annual GDP of
4.0%(1) represents a fall from the post pandemic recovery in 2021
(GDP: 7.5%). Global energy and food supply shocks caused by the
Russian invasion of Ukraine saw huge rises in European wholesale
gas and commodity prices. Rising energy, food and other goods
prices drove inflation to a high of 11.1%(1) in October 2022. The
Bank of England has responded with rises in its Base Rate of
interest throughout the year to a level of 3.5% at the end of
December 2022, which is the highest level since the 2008 financial
crisis. Economists had predicted the UK would be in recession for
the majority of 2023, but are now more optimistic that zero GDP is
more likely. The increases in the real cost of living will
adversely impact on consumers' disposable incomes and challenge the
affordability of household bills and consumers' appetite for
discretionary spending.
Employment levels are encouraging at 75.6%(1) . Unemployment
remains at a low level of 3.7%(1) , and vacancies in the labour
market remain at high levels of circa 1.2 million1. Given the
recessionary outlook and continued pressures on employers from
borrowing and energy costs, unemployment is expected to rise
towards 4.5% in early 2024.
House prices continued to grow in 2022. However, growth slowed
in the second half as falling incomes and higher interest rates
take effect on property transactions. The move in recent years of
the mortgage market to fixed rates has provided a level of
insulation to borrowers with regard to the extent of forced sales.
However, a house price correction is expected in 2023 and 2024.
The UK Government has provided over GBP100 billion(2) in support
measures throughout the year including the May 2022 cost-of-living
package, the September energy package which provided energy cost
support for households and businesses, tax cuts announced in
September that were largely reversed in October, and in the
November Autumn statement further near-term support through
cost-of-living payments for those in receipt of benefits. It is
estimated that Government intervention on energy costs reduced the
peak of inflation by 3.5%(2) but will weigh on growth as Government
borrowing increased.
Outlook
Whilst inflation does appear to have peaked in Q4 2022, interest
rates are expected to continue to rise in 2023 peaking at between
4% and 4.5% in early 2023 with the Monetary Policy Committee target
inflation rate of 2% not expected to be achieved until 2025. The UK
economy is expected to contract in 2023, house prices are expected
to continue to fall after a long period of successive increases,
and unemployment is expected to rise from its current low levels.
With ongoing geopolitical uncertainty the balance of risks to the
UK remains skewed to the downside.
Government and regulatory
This has been another eventful year for Government and
regulatory announcements which potentially impact the Group. The
key announcements in 2022 are set out below.
Prudential regulation
The Group became subject to revised regulatory requirements from
1 January 2022, as set out in the policy statements PS21/21 'The UK
Leverage Ratio Framework' and PS22/21 'Implementation of Basel
Standards: Final Rules'. These changes had an impact on the Group's
regulatory requirements, including capital, large exposures, net
stable funding and leverage, and Pillar 3 reporting.
The PRA consulted on proposals for a strong and simple
prudential framework for non-systemic banks and building societies.
In April 2022 within the consultation paper CP5/22: 'The Strong and
Simple Framework: a definition of a Simpler-regime Firm'. This set
out the proposed eligibility requirements to qualify under this
regime. The Group is likely to qualify for this regime.
During June 2022, the PRA issued CP6/22 'Model risk management
principles for banks' consulting on stronger governance
expectations for model governance to address observed shortcomings
within the industry. The proposals reference making a board member
responsible for model risk management matters and references a
proportionate approach, potentially with less onerous requirements
for firms considered as 'Simpler Regime' firms. The PRA propose to
incorporate these revised expectations into a new Supervisory
Statement which is expected to be issued during 2023. A working
group has been established to review the potential implications for
the Group.
In November 2022, the PRA issued CP16/22 'The PRA consults on
proposals for implementation of the Basel 3.1 standards' setting
out its proposed changes to regulatory requirements, which are
expected to become effective on 1 January 2025. The proposals set
out changes to the regulatory environment, including significant
changes to the capital requirements for credit risk and operational
risk. The guidance also proposes allowing those firms which are
eligible for the Simpler Regime to apply for a waiver not to adopt
Basel 3.1 and instead remain on the current UK Capital Requirements
Regulation regime until the capital rules applicable to the Simpler
Regime are launched. Further consultation papers for requirements
under this regime are not expected until 2023 and 2024, and for
which an implementation date is still to be announced. The Group is
reviewing CP16/22 to understand the potential impact under the
proposed full rules and decide whether it will adopt the full rules
or defer and adopt the Simpler Regime.
As expected from 13 December 2022, the UK Countercyclical
Capital Buffer ('CCyB') rate increased from 0% to 1%. In July 2022,
the Financial Policy Committee ('FPC') confirmed a further increase
in the UK CCyB rate to 2% from 5 July 2023. The FPC have
subsequently stated that they will continue to monitor the CCyB
rate due to the current uncertainty around the economic
outlook.
In response to the normalisation of the CCyB towards its 2%
target level, the PRA announced on 13 June 2022 that the temporary
PRA buffer increase to all firms that received a Pillar 2A capital
reduction under the PS15/20 'Pillar 2A: Reconciling capital
requirements and macroprudential buffers' would no longer apply
from December 2022. The Group's capital planning process
incorporates changes and future expected changes to its capital
requirements.
1. Source: Office for National Statistics, data as at 31
December 2022 unless otherwise stated.
2. Source: Office of Budget Responsibility: Economic and Fiscal
Outlook November 2022.
Conduct regulation
The FCA has also published several reports and new rules. In
July 2022, the FCA issued their policy statement on the new
Consumer Duty, which sets a higher and clearer level of
outcomes-based consumer protection in retail financial markets. The
duty comes into force on 31 July 2023. The first key milestone for
implementing the duty required firms' boards to approve
implementation plans by end October 2022, which has been completed
by the Group. A project is in place to manage implementation across
Group.
The FCA continues to focus on supporting consumers who are
struggling with the rising cost of living. In July 2022 they
published a Dear Chair letter requiring banks to improve the
treatment of struggling business borrowers through their
collections and recoveries activities. In November 2022 the FCA
published findings from their Borrowers in Financial Difficulty
review, which highlighted, in the FCA's view, that firms need to do
more to support customers in financial difficulty. The FCA will
continue to monitor data to assess how firms are delivering
forbearance. The Group continues to review reports and guidance in
this area to build on its existing processes and procedures to
support its customers through any financial difficulty.
In October 2022, the Payment Services Regulator confirmed the
extension of the confirmation of payee rollout to an additional 400
firms. The service is designed to prevent accidentally misdirected
payments and authorised push payment scams.
Government and monetary policy
In May 2022, the Government responded to the Department for
Business, Energy and Industrial Strategy ('BEIS') 'Restoring trust
in audit and corporate governance' which provided more detail of
the expected reforms. The timetable for implementation remains
unclear. The proposals include a stronger sanctions regime for
directors who breach their legal duties in relation to corporate
reporting and audit, along with additional requirements of 'large'
public interest entities. It is expected many of the proposals will
not to be applicable to the Group due to its size.
Following a consultation on the optimal structure for UK
financial services post-Brexit, the Financial Services and Markets
Bill (the 'FSMB') was introduced to Parliament on 20 July 2022 and
aims to implement the outcomes of the Government's future
regulatory framework review and to make changes to update the UK
regulatory regime. The FSMB intends to move away from the on shored
EU legislation towards the historical approach taken under the
FSMA, whereby primary responsibility for regulation is delegated to
the UK regulatory authorities, subject to the oversight of
Parliament. The FSMB would implement the results of HM Treasury's
wholesale markets review response published in March 2022, and
provisions in respect of digital settlement assets, direct
supervision of critical third-party service providers, changes to
the financial promotions regime and insurers in financial
difficulties among other things.
In December 2022, the UK Government released a package of
proposed reforms to financial services regulation referred to as
the 'Edinburgh Reforms'. The reforms are wide ranging, featuring
thirty separate announcements and including (without limitation)
proposed amendments to the ring-fencing and non-performing exposure
regimes. HM Treasury has also proposed to use post-Brexit
legislative flexibility to modernise UK financial services
legislation by relaxing certain EU-derived provisions of prudential
regulation. Details of the reforms and timing of implementation are
not yet fully known, therefore the impact on the Group remains
uncertain.
The Bank of England MPC announced eight consecutive increases in
the UK Base Rate over the course of 2022 taking rates up from 0.25%
at the start of the year to 3.5% at the end of December 2022.
Rising interest rates have had a significant impact on the Group's
funding costs and appropriate action has been taken to manage new
business pricing and overall net interest margin.
An increase to future Corporation Tax rates was announced and
legislated in 2021. After some contrary announcements the increase
was confirmed by the 2022 Autumn Statement along with changes to
banking surcharge that had been legislated for earlier in 2022. The
Corporation Tax rate will increase from 19% to 25% with effect from
1 April 2023, having a negative impact on the Group's earnings. At
the same time, the banking surcharge will reduce from 8% to 3% and
the surcharge allowance available to banking groups will increase
from GBP25 million to GBP100 million. This change to the banking
surcharge will have a positive impact on the Group but results in a
deferred tax charge in 2022 due to a reduction to deferred tax
asset values calculated from expected future tax relief based on
enacted rates.
Principal risks and uncertainties
Risk management
The effective management of risk is a key part of the Group's
strategy and is underpinned by our Risk Aware value. This helps to
protect the Group's customers and generate sustainable returns for
shareholders. The Group is focused on ensuring that it maintains
sufficient levels of capital, liquidity and operational control,
and acts in a reputable way.
The Group's Chief Risk Officer is responsible for leading the
Group's Risk function, which is independent from the Group's
operational and commercial teams. The Risk function is responsible
for designing and embedding appropriate risk management frameworks,
processes and controls, and making sure that they are sufficiently
robust, so that key risks are identified, assessed, monitored and
accepted or mitigated in line with the Group's risk appetite. The
Chief Risk Officer is responsible for reporting to the Board on the
Group's principal risks and how these are being managed against
agreed risk appetite.
Risk appetite
The Group has identified the risk drivers and major risk
categories relevant to the business, which has enabled it to
produce a comprehensive suite of risk appetite statements and
metrics which underpin the strategy of the Group. The Board
approves the Group's risk appetite statements, which define the
level and type of risk that the Group is prepared to accept in the
achievement
of its strategic objectives.
Risk culture
A strong risk aware culture is integral to the successful
delivery of the Group's strategy and the effective management of
risk. The Group's risk culture is shaped by a range of factors
including risk appetite, risk frameworks and policies, values and
behaviours, and a clear tone from the top of the organisation.
The Group has an ongoing focus on developing its risk management
practices and enhancing its risk culture. In 2022, the Group
revised its risk frameworks and policies, delivered training at all
levels of the Group, and has driven increased accountability and
ownership of Risk within the first line of defence.
Risk governance
The Group's approach to managing risk is defined within its
Enterprise-Wide Risk Management Framework. This provides a clear
risk taxonomy for the Group and provides an overarching framework
for risk management supported by individual risk discipline
frameworks and policies, which set the standards on risk
identification and assessment, mitigation, monitoring and
reporting. The Group's risk management frameworks, policies and
procedures are regularly reviewed and updated to reflect the risks
that the Group faces in its business activities and are appropriate
for the nature, scale and complexity of the Group's operations. The
Group's risk management frameworks support decision-making across
the Group and are designed to ensure that risks are appropriately
managed and reported via risk-specific committees.
Established risk committees are in place at Board, Group and
individual business unit level to enable clear oversight of risk
management, including robust risk identification and mitigation
across the Group.
An Executive Risk Committee, chaired by the Chief Risk Officer,
reviews key risk management information from across the risk
disciplines, with material issues escalated to the Executive
Committee and/or the Risk Committee of the Board, as required.
The Group operates a 'Three Lines of Defence' model for the
management of its risks. The Three Lines of Defence, when taken
together, control and manage risks in line with the Group's risk
appetite. The three lines are:
-- First line: all employees within the business units and
associated support functions including Operations, Finance,
Treasury,
Human Resources and Legal. The first line has ownership of and
primary responsibility for their risks;
-- Second line: specialist risk management and compliance teams
reporting directly into the Chief Risk Officer covering Credit
risk, Operational risk, Prudential risk, Compliance and Financial
crime. The second line are responsible for developing frameworks to
assist the first line in the management of their risks and
providing oversight and challenge designed to ensure these are
managed within appetite; and
-- Third line: is the Internal Audit function which provides
independent assurance on the effectiveness of risk management
across the Group.
1. Board Committees
See Corporate Governance section on pages 60 to 119 of the 2022
Annual Report and Accounts
2. Group Executive Committee
Chair: Chief Executive Officer
-- Provides an executive oversight of the on-going safe and
profitable operation of the Group. It reports to the Board through
the Chief Executive Officer.
-- Responsible for the execution of the strategy of the Group at
the direction of the Chief Executive Officer.
3.1 Executive Risk Committee
Chair: Chief Risk Officer
-- Responsible for overseeing the Group's risk profile, its
adherence to regulatory compliance and monitoring these against the
risk appetite set by Board.
-- Monitors the effective implementation of the risk management framework across the Group.
3.2 Assets and Liabilities Committee ('ALCO')
Chair: Chief Financial Officer
-- Responsible for implementing and controlling the liquidity,
and asset and liability management risk appetite of the Group,
providing high level control over the Group's balance sheet and
associated risks.
-- Sets and controls capital deployment, treasury strategy
guidelines and limits and focuses on the effects of future plans
and strategy on the Group's assets and liabilities.
4.1 Credit Committees
-- Responsible for making decisions on lending, inclusive of
oversight of credit scorecards and modelling.
4.2 Model Governance Committee
-- Responsible for understanding, challenging, and assessing
risk, weakness, and appropriateness of statistical and financial
models and to challenge model assumptions and suitable model
validation.
4.3 Other Committees
-- The activities of the Executive Risk Committee and ALCO are
also supported by various specialist sub-committees and working
groups, covering: Liquidity, Financial Crime, Compliance and
Regulation, Operational Risk, Assumptions and Climate Change.
Principal risks
Executive management performs ongoing monitoring and assessment
of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity.
Further details of the principal risks and the changes to risk
profile seen during the 2022 financial year are set out below. In
line with the Group's updated Enterprise-Wide Risk Management
Framework, Model risk has been added as a principal risk and
Regulatory risk has been incorporated within Compliance and Conduct
risk.
The Group also regularly reviews strategic and emerging risks
and analysis has been included to detail output of these
reviews
for 2022.
Notes 39 to 42 to the financial statements provide further
analysis of credit, liquidity, market and capital risks.
Further details of the Group's risk management framework,
including risk appetite, can be found on the Group's website:
www.securetrustbank.com/our-corporate-information/risk-management
Credit risk
Description
The risk of loss to the Group from the failure of clients,
customers, or counterparties to honour fully their obligations to
the firm, including the whole and timely payment of principal,
interest, collateral, or other receivables.
Mitigation
-- The Group has a defined Credit risk framework, which sets out
how Credit risk is managed and mitigated across the Group.
-- Risk appetite is cautious with the Group focusing on sectors
and products where it has deep experience.
-- Specialist Credit teams are in place within each business
area to enable new lending that is originated in line with Group
risk appetite.
-- For Business Finance, lending is secured against assets, with
Real Estate Finance lending, the majority of which is at fixed
rates, secured by property at conservative loan-to-value ratios and
short dated Commercial Finance lending secured across a range of
assets, including debtors, stock and plant and machinery.
-- For Consumer Finance, security is taken for Vehicle Finance
lending and Retail Finance is unsecured, however positioned towards
lower risk sectors. The majority of Retail Finance lending is
interest free for consumers, with remaining consumer lending at
fixed rates, which mitigates the direct impact of rising interest
rates on affordability. Consumer Credit risk is assessed through a
combination of risk scorecards, credit and affordability policy
rules.
-- Portfolio performance is tracked closely and reported via
specialist management review meetings, into the Executive and Board
Risk Committees, with ability to make changes to policy,
affordability assessments or scorecards on an active basis.
-- Although the Group does not routinely offer forbearance, it
may offer temporary arrangements where appropriate. Further
information can be found in Note 39.2 to the Financial
Statements.
-- Management monitors and assesses concentration risk for all
lending against control limits. The diversification of lending
activities and secured nature of larger exposures mitigates the
exposure of the Group to concentration risk.
-- The Group routinely monitors the credit ratings of the
counterparties in relation to the Group's loans and advances to
banks.
Change during the year - Heightened
During the second half of 2022, economic conditions deteriorated
in the UK with price increases, particularly energy prices, leading
to high levels of inflation and cost of living pressures for
consumers. In addition to energy prices, businesses experienced
supply chain and labour market pressures. Both consumers and
businesses started to be impacted by rising interest rates at the
end of the period.
The Group's lending portfolios performed well in 2022. Retail
Finance arrears remained low by historical comparison as a result
of a move into lower risk sectors, and whilst an increase was seen
in Vehicle Finance, this reflected the return back to the market
following the pandemic with overall provisions at an equivalent
level to pre pandemic. Business Finance had low levels of
provisions in the period, representing robust client selection and
the secured nature of lending in these areas.
Overall rating for the year is driven by the uncertainty of the
operating environment.
Liquidity and Funding risk
Description
Liquidity risk is the risk that the Group is unable to meet its
liquidity obligations as they fall due or can only do so at
excessive cost. Funding risk is the risk that the Group is unable
to raise or maintain funds to support asset growth, or the risk
arising from an unstable funding profile which could result in
higher funding costs.
Mitigation
Liquidity and Funding risk is managed in line with the Group's
Prudential Risk Management Framework and the Liquidity and Funding
Risk policy. The framework defines:
-- The governance arrangements for managing and reporting these risks;
-- Risk appetite statements and associated thresholds and metrics; and
-- The escalation process in the event of a breach of risk appetite.
The Group has a defined set of liquidity and funding risk
appetite measures which are monitored daily and monthly.
The Group manages its liquidity and funding in line with
internal and regulatory requirements, and at least annually
assesses its exposure to liquidity risks and adequacy of its
liquidity resources as part of the Group's Internal Liquidity
Adequacy Assessment Process ('ILAAP').
In line with the Prudential Regulation Authority's ('PRA')
self-sufficiency rule, the Group always seeks to maintain liquid
resources which are adequate, both as to amount and quality, and
managed to ensure that there is no significant risk that its
liabilities cannot be met as they fall due under stressed
conditions. The Group defines liquidity adequacy as the:
-- ongoing ability to accommodate the refinancing of liabilities
upon maturity and other means of deposit withdrawal at acceptable
cost;
-- ability to fund asset growth; and
-- otherwise, capacity to meet contractual obligations through
unconstrained access to funding at reasonable market rates.
The Group conducts regular and comprehensive liquidity stress
testing to identify sources of potential liquidity strain and to
check that the Group's liquidity position remains within the
Board's risk appetite and prudential regulatory requirements and
limits.
Contingency funding plans
The Group maintains a Recovery Plan which sets out how the Group
would maintain sufficient liquidity to remain viable during a
severe liquidity stress event. The Group also retains access to the
Bank of England liquidity schemes, including the Discount Window
Facility.
Change during the year - Stable
Stress tests performed as part of the ILAAP confirmed that the
Group has sufficient funds to meet all regulatory requirements and
that there is no significant risk that liabilities cannot be met as
they fall due. The rising interest rate environment has increased
competitive pressures in deposit pricing and impacted customer
behaviour. Despite this, the Group has maintained its liquidity
ratios in excess of regulatory requirements throughout the
year.
Capital risk
Description
Capital risk is the risk that the Group will have insufficient
capital resources to meet minimum regulatory requirements and to
support levels of growth.
The Group adopts a conservative approach to managing its
capital. It annually assesses the adequacy of the amount and
quality of capital held under stress as part of the Group's
Internal Capital Adequacy Assessment Process ('ICAAP').
Mitigation
Capital management is defined as the operational and governance
processes by which capital requirements are identified and capital
resources maintained and allocated, such that regulatory
requirements are met while maximising returns and supporting
sustainable growth.
The Group manages its capital requirements on a forward-looking
basis against minimum regulatory requirements and the Board's risk
appetite to ensure capital resources are sufficient to support
planned levels of growth.
The Group will take opportunities to increase overall levels of
capital and to optimise its capital stack as and when appropriate.
In addition to the ICAAP, the Group performs regular budgeting and
reforecasting exercises which consider a five-year time horizon.
These forecasts are used to plan for future lending growth at a
rate that both increases year-on-year profits and maintains a
healthy capital surplus, taking into consideration the impact of
known and anticipated future regulatory changes including the
estimated impact of the re-introduction of the countercyclical
capital buffer requirement. The PRA proposed increase to this
buffer is explained on page 24 of the 2022 Annual Report and
Accounts has been reflected in capital planning.
The Group also models various stressed scenarios looking over a
five-year time horizon, which consider a range of growth rates over
those years as part of the viability and going concern
assessments.
Further information on the Group's capital requirement is
contained within the Pillar 3 disclosures which are published as a
separate document on our website
https://www.securetrustbank.com/investors/news-announcements/results-reports/pillar-3.
Change during the year - Stable
The Group continues to meet its capital ratio measures taking
into consideration the increased requirements driven by planned
growth and increasing regulatory requirements and continues to
operate within agreed risk appetite. Details of the common equity
tier 1 ratio, total capital ratio and leverage ratio are included
in the Financial review on page 16 of the 2022 Annual Report and
Accounts.
The 2022 ICAAP showed that the Group can continue to meet its
minimum regulatory capital requirements, even under extreme stress
scenarios. The COVID-19 pandemic demonstrated the benefit of the
relatively short duration of the Group's lending portfolios. This
feature of our balance sheet allows us to flex lending growth rates
in response to changing economic conditions.
Market risk
Description
Market risk is the risk to the Group's earnings and/or value
from unfavourable market movements such as interest rates and
foreign exchange rates. The Group's market risk primarily arises
from interest rate risk. Interest rate risk refers to the exposure
of the Group's financial position, balance sheet and earnings to
movements in interest rates.
The Group's balance sheet is predominantly denominated in GBP,
although a small number of transactions are completed in US
Dollars, Euros and other currencies in support of Commercial
Finance customers. The Group has no significant exposures to
foreign currencies and hedges any residual currency risks to
Sterling.
Mitigation
The Group's principal exposure comes from the term structure of
interest rate sensitive items and the sensitivity of the Group's
current and future earnings and economic value to movements in
market interest rates. The Group does not take significant
unmatched positions through the application of hedging strategies
and does not operate a trading book. The main contributors to
interest rate risk are:
-- the mismatch, or duration, between repricing dates of assets and liabilities; and
-- customer optionality, for example, early repayment of loans
in advance of contractual maturity dates.
The Group uses an interest rate sensitivity gap analysis which
informs the Group of any significant mismatched interest rate risk
positions that require hedging. This takes into consideration the
behavioural assumptions for optionality as approved by ALCO. Risk
positions are managed through the structural matching of assets and
liabilities with similar tenors and the use of derivative
instruments to hedge the residual unmatched position and minimise
the Group's exposure to interest rate risk.
The Group has a defined set of market risk appetite measures
which are monitored monthly. Interest rate risk in the banking book
is measured from an internal management and regulatory perspective
taking into consideration both an economic value and earnings-based
approach.
The Group monitors its exposure to basis risk and any residual
non-GBP positions. Processes are in place to review and react to
movements to the Bank of England Base Rate.
All such exposures are maintained within the risk appetite set
by the Board and are monitored by ALCO.
Change during the year - Stable
Despite material increases in the Bank of England Base Rate in
2022 following a period of very low rates, the Group remained
within risk appetite in respect of interest rate risk and market
risk throughout the year.
The Group has made further enhancements to market risk
management in 2022, including the implementation of a new Asset and
Liability Management system.
Operational risk
Description
Operational risk is the risk that the Group may be exposed to
direct or indirect loss arising from inadequate or failed internal
processes, personnel and succession, technology/ infrastructure, or
from external factors.
The scope of Operational risk is broad and includes business
process, business continuity, third party risk, Change, Human
Resources, Information Security and IT risk, including Cyber
risk.
Mitigation
The Group has an Operational Risk Framework designed in
accordance with the 'Principles for the Sound Management of
Operational Risk' issued by the Basel Committee on Banking
Supervision. This framework defines and facilitate these
activities:
-- a risk and control self-assessment process to identify,
assess and mitigate risks across all business units through
improvements to the control environment;
-- the governance arrangements for managing and reporting these risks;
-- risk appetite statements and associated thresholds and metrics; and
-- an incident management process that defines how incidents
should be managed and associated remediation, reporting and
root-cause analysis.
The framework is designed to ensure appropriate governance is in
place to provide adequate and effective oversight of the Group's
operational risks. The governance framework includes the Group
Operational Risk, Executive Risk and Board Risk Committees.
The Group has a defined set of qualitative and quantitative
operational risk appetite measures. These measures cover all
categories of operational risk and are reported and monitored
monthly.
In addition to the delivery of framework requirements, the Group
has focused on these thematic areas of Operational Risk in
2022:
-- Supplier management -The Group recognises that it is
important to manage suppliers effectively and has embedded a suite
of standard controls for all its material suppliers to reduce the
risk of operational impacts. The Group has implemented the
regulatory requirements for Third-Party Risk Management.
-- Operational and IT resilience - The Operational Risk
Framework supports the ongoing resilience of the Group's
operational
and IT services, including business continuity management,
disaster recovery, incident management, process management,
and the cyber strategy. The Group has implemented the regulatory
requirements for operational resilience.
-- Information security and cyber risk - The Group has paid
considerable attention to ensuring the effective management of
risks arising from a failure or breach of its information
technology systems that could result in customer exposure, business
disruption, financial losses, or reputational damage.
-- Hybrid working - The Group now permanently operates in a
hybrid environment. To ensure alignment with the Financial Conduct
authority's ('FCA') hybrid/ remote working expectations (published
in October 2021), detailed risk and control assessments were
performed to check control functions remained effective.
Change during the year - Stable
The Group uses the 'The Standardised Approach' for assessing its
operational risk capital, in recognition of the enhancements made
to its framework and embedding this across the Group. The Group
continues to invest in resource, expertise, and systems to support
the Operational Risk Framework. In 2022 the Group has continued to
enhance these standards and has introduced several improvements to
the control frameworks in place across its operational risks.
Overall, the assessment is that the level of risk has remained
stable.
Model risk
Description
Model risk is the potential for adverse consequences from model
errors or the inappropriate use of modelled outputs to inform
business decisions.
The Group has multiple models which are used, amongst other
things, to support pricing, strategic planning, budgeting,
forecasting, regulatory reporting, credit risk management and
provisioning.
Model risk has been elevated to a principal risk following a
review of the Group's Enterprise-Wide Risk Management
Framework.
Mitigation
The Group has a Model Risk Management policy which governs its
approach to model risk and sets out:
-- Model risk appetite
-- Model and model risk definitions
-- Roles and responsibilities for model risk management
As required within its policy, the Group maintains a model
inventory and a risk register incorporating specific model related
risks.
Change during the year - Heightened
The Group, supported by the output of an Internal Audit review
has taken steps to improve its approach to model risk management,
including recruiting new roles and working with a specialist third
party to support a refresh of its policy and established enhanced
monitoring and reporting. This work will continue in 2023. This
aligns with the expectation of an updated supervisory statement in
H1 2023. Heightened status reflects increased internal focus and
regulatory expectations.
Compliance and Conduct risk
Description
The risk that the Group's products and services, and the way
they are delivered, result in poor outcomes for customers or
markets in which we operate, or cause harm to the Group. This could
be as a direct result of poor or inappropriate execution of our
business activities or behaviour from our employees. This now
incorporates regulatory risk which was presented as a separate
principal risk in the 2021 Annual Report and Accounts.
Mitigation
The Group manages this risk through its Compliance and Conduct
Risk Management Framework. The Group takes a principles-based
approach which includes retail and commercial customers in our
definition of 'customer', with coverage across all business units
and both regulated and unregulated activities.
Risk management activities include horizon scanning of
regulatory changes, oversight of regulatory incidents, and
reporting against risk appetite metrics.
The Group's horizon scanning activities track industry and
regulatory developments including the PRA's work on a strong and
simple prudential framework for non-systemic banks and building
societies, the implementation of the Basel 3.1 standard, the
Government's national data strategy and the PRA and FCA's
transformation agendas related to data.
Key initiatives continuing into 2023 are the Consumer Duty (for
which a Group project is in place to deliver the agreed
implementation plan); changes to the Appointed Representatives
regime; and confirmation of payee requirements.
Change during the year - Stable
The Group has continued to operate within overall risk appetite,
remaining focused on delivering good customer outcomes.
Financial Crime risk
Description
The risk that the Group fails to prevent the facilitation of
financial crime by not having effective systems and controls in
line with regulatory requirements.
Mitigation
We operate in a constantly evolving financial crime environment,
with the economic climate impacting the level and type of threat
faced by the financial services industry by those attempting to
take advantage of the period of uncertainty.
The Group has no appetite for failing to maintain effective,
systems, resources and controls and robust oversight to mitigate
the risk of the Group's products and services being used to
facilitate financial crime.
The Group has a Financial Crime Framework designed to meet
regulatory and legislative obligations which includes:
-- Mandatory annual colleague training and awareness initiatives
and regular reviews of our policies and standards.
-- Horizon scanning and regular management information
production and analysis conducted to identify emerging threats,
trends and typologies as well as preparing for new legislation and
regulation.
-- Financial crime focused governance forums and risk committees
providing senior management oversight, challenge and risk
escalation.
-- Participating in key industry forums (or associations) such as those hosted by UK Finance.
Change during the year - Stable
The Group appointed a new Head of Financial Crime and Money
Laundering Reporting Officer in November 2022. The Group continued
to enhance its Financial Crime Framework in 2022, recognising the
evolving nature of financial crime risk, with measures
including:
-- Completion of annual Enterprise-Wide Risk Assessment and
Money Laundering and Reporting Officer reports.
-- Group-wide anti-bribery and corruption, facilitation of tax
evasion and fraud standards have been implemented to enhance
further the economic crime framework, and work to help ensure that
sanctions risk is minimised.
-- Specialist economic crime training has been provided to the
Board and Executive and the internal financial crime awareness
campaign under the banner of 'Spot the signs, stop the crimes' is
regularly communicated across the Group.
Climate Change risk
Description
Climate change, and society's response to it, present risks to
the UK financial services sector. While some of these risks will
only fully crystallise over an extended period, there are some
shorter-term risks reflective of the strategic responses from other
organisations, governments and regulators.
Mitigation
The Group has now established processes to monitor our risk
exposure to both the potential 'Physical' effects of climate change
and the 'Transitional' risks from the UK's adjustment towards a
carbon neutral economy. A Climate Change Working Group, reporting
to the Executive Risk Committee, is in place and meets regularly
with senior representation from across the Group. Stress testing
work has been completed for our Vehicle Finance and Real Estate
Finance businesses to test the resilience of our portfolios and
strategies to manage the risks and opportunities of climate change.
Further detail is provided within the Climate-related financial
disclosures section of the Annual Report and Accounts (see pages 50
to 59 of the 2022 Annual Report and Accounts).
Change during the year - Stable
The Group's direct exposure to the physical impacts of climate
change is relatively limited, given its footprint and areas of
operation. However, it has established robust controls to manage
the associated risks and will continue to develop our business
plans in the future as the risks evolve. Disclosures are made in
this year's Annual Report and Accounts in line with the guidance
from the 'Task Force on Climate-related financial disclosures'.
Specific detail on each of the key risks identified and mitigation
are covered within the 'Strategy' section of our Climate-related
financial disclosures on page 51 of the 2022 Annual Report and
Accounts.
Strategic and emerging risks
In addition to the principal risks disclosed above, the Board
and Executive Committee regularly consider strategic and emerging
risks, including key factors, trends and uncertainties which could
impact the performance of the Group.
The key strategic risk identified by the Executive and reported
through to the Risk Committee was the macroeconomic environment in
the UK. The Group operates exclusively within the UK and therefore
its performance is influenced by the performance of the UK economy.
Weaknesses in economic position or outlook can impact the demand
for the Group's products, returns that can be achieved and the
level of impairments.
2022 saw rapid increases in inflation, driven principally by
increases in energy costs as a result of the conflict in Ukraine
and other supply chain and labour market issues. The Bank of
England response to higher inflation has been to increase interest
rates, with continued upward pressure into 2023 creating
uncertainty for consumers and businesses.
The Group has taken proactive action to reflect these changes in
lending parameters to continue to operate within its Credit risk
appetite and maintain support for its customers.
Whilst material direct impacts have not yet been seen, the Group
continues to monitor closely the macroeconomic environment to
assess the impact of these changes on its customer and financial
performance.
Directors' responsibility statement
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare Financial
Statements for each financial year. Under that law the Directors
are required to prepare the Group Financial statements in
accordance with United Kingdom adopted international accounting
standards. The Financial Statements also comply with International
Financial Reporting Standards ('IFRSs') as issued by the IASB. The
Directors have also chosen to prepare the parent Company Financial
Statements under United Kingdom adopted international accounting
standards. Under company law the Directors must not approve the
Financial Statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that period.
In preparing these Financial Statements, International
Accounting Standard 1 requires that Directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements of the financial reporting framework are
insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity's financial
position and financial performance; and
-- make an assessment of the company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the Financial Statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement
Each of the Directors who are in office at the date of this
report and whose names and roles are listed on pages 61 to 63 of
the 2022 Annual Report and Accounts confirm that to the best of our
knowledge:
-- the Financial Statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole;
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face; and
-- the Annual Report and Financial Statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
Consolidated statement of comprehensive income
For the year ended 31 December
Restated
(1)
2022 2021
Note GBPmillion GBPmillion
---------------------------------------------------------- ---- ----------- -----------
Income statement
---------------------------------------------------------- ---- ----------- -----------
Continuing operations
---------------------------------------------------------- ---- ----------- -----------
Interest income and similar income 4.1 203.0 163.9
---------------------------------------------------------- ---- ----------- -----------
Interest expense and similar charges 4.1 (50.4) (27.7)
---------------------------------------------------------- ---- ----------- -----------
Net interest income 4.1 152.6 136.2
---------------------------------------------------------- ---- ----------- -----------
Fee and commission income 4.2 17.4 13.3
---------------------------------------------------------- ---- ----------- -----------
Fee and commission expense 4.2 (0.4) (0.6)
---------------------------------------------------------- ---- ----------- -----------
Net fee and commission income 4.2 17.0 12.7
---------------------------------------------------------- ---- ----------- -----------
Operating income 169.6 148.9
---------------------------------------------------------- ---- ----------- -----------
Net impairment charge on loans and advances to customers 17 (38.2) (5.0)
---------------------------------------------------------- ---- ----------- -----------
Gains on modification of financial assets 5 1.1 1.5
---------------------------------------------------------- ---- ----------- -----------
Fair value losses on financial instruments 6 (0.3) (0.1)
---------------------------------------------------------- ---- ----------- -----------
Operating expenses 7 (93.2) (89.4)
---------------------------------------------------------- ---- ----------- -----------
Profit before income tax from continuing operations 39.0 55.9
---------------------------------------------------------- ---- ----------- -----------
Income tax expense 9 (9.4) (10.4)
---------------------------------------------------------- ---- ----------- -----------
Profit for the year from continuing operations 29.6 45.5
---------------------------------------------------------- ---- ----------- -----------
Discontinued operations
---------------------------------------------------------- ---- ----------- -----------
Profit before income tax from discontinued operations 10 5.0 0.1
---------------------------------------------------------- ---- ----------- -----------
Income tax expense 10 (0.9) -
---------------------------------------------------------- ---- ----------- -----------
Profit for the year from discontinued operations 10 4.1 0.1
---------------------------------------------------------- ---- ----------- -----------
Profit for the year 33.7 45.6
---------------------------------------------------------- ---- ----------- -----------
Other comprehensive income
---------------------------------------------------------- ---- ----------- -----------
Items that will not be reclassified to the income
statement
---------------------------------------------------------- ---- ----------- -----------
Revaluation reserve movements 0.1 0.5
---------------------------------------------------------- ---- ----------- -----------
Taxation 0.2 (0.1)
---------------------------------------------------------- ---- ----------- -----------
0.3 0.4
---------------------------------------------------------- ---- ----------- -----------
Items that will be reclassified to the income statement
---------------------------------------------------------- ---- ----------- -----------
Cash flow hedge reserve movements (0.8) (0.4)
---------------------------------------------------------- ---- ----------- -----------
Reclassification to the income statement 0.1 -
---------------------------------------------------------- ---- ----------- -----------
Taxation 0.2 0.1
---------------------------------------------------------- ---- ----------- -----------
(0.5) (0.3)
---------------------------------------------------------- ---- ----------- -----------
Other comprehensive income for the year, net of
income tax (0.2) 0.1
---------------------------------------------------------- ---- ----------- -----------
Total comprehensive income for the year 33.5 45.7
---------------------------------------------------------- ---- ----------- -----------
Profit attributable to equity holders of the Company 33.7 45.6
---------------------------------------------------------- ---- ----------- -----------
Total comprehensive income attributable to equity
holders of the Company 33.5 45.7
---------------------------------------------------------- ---- ----------- -----------
Earnings per share for profit attributable to the
equity holders of the Company during the year (pence
per share)
---------------------------------------------------------- ---- ----------- -----------
Basic earnings per ordinary share 11.1 180.5 244.7
---------------------------------------------------------- ---- ----------- -----------
Diluted earnings per ordinary share 11.2 174.7 239.4
---------------------------------------------------------- ---- ----------- -----------
Basic earnings per ordinary share - continuing operations 158.5 244.1
---------------------------------------------------------- ---- ----------- -----------
Diluted earnings per ordinary share - continuing
operations 153.4 238.9
---------------------------------------------------------- ---- ----------- -----------
1. Restated to reflect the disclosure of discontinued
operations. See Note 10 for further details.
Consolidated statement of financial position
As at 31 December
2022 2021
Note GBPmillion GBPmillion
------------------------------------------------- ----- ----------- -----------
ASSETS
------------------------------------------------- ----- ----------- -----------
Cash and Bank of England reserve account 370.1 235.7
------------------------------------------------- ----- ----------- -----------
Loans and advances to banks 13 50.5 50.3
------------------------------------------------- ----- ----------- -----------
Debt securities 14 - 25.0
------------------------------------------------- ----- ----------- -----------
Loans and advances to customers 15,16 2,919.5 2,530.6
------------------------------------------------- ----- ----------- -----------
Fair value adjustment for portfolio hedged risk 18 (32.0) (3.5)
------------------------------------------------- ----- ----------- -----------
Derivative financial instruments 18 34.9 3.8
------------------------------------------------- ----- ----------- -----------
Assets held for sale 19 - 1.3
------------------------------------------------- ----- ----------- -----------
Investment property 20 - 4.7
------------------------------------------------- ----- ----------- -----------
Property, plant and equipment 21 10.3 9.3
------------------------------------------------- ----- ----------- -----------
Right-of-use assets 22 1.5 2.2
------------------------------------------------- ----- ----------- -----------
Intangible assets 23 6.6 6.9
------------------------------------------------- ----- ----------- -----------
Current tax assets - 0.8
------------------------------------------------- ----- ----------- -----------
Deferred tax assets 25 5.5 6.9
------------------------------------------------- ----- ----------- -----------
Other assets 26 13.4 11.9
------------------------------------------------- ----- ----------- -----------
Total assets 3,380.3 2,885.9
------------------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
------------------------------------------------- ----- ----------- -----------
Liabilities
------------------------------------------------- ----- ----------- -----------
Due to banks 27 400.5 390.8
------------------------------------------------- ----- ----------- -----------
Deposits from customers 28 2,514.6 2,103.2
------------------------------------------------- ----- ----------- -----------
Fair value adjustment for portfolio hedged risk 18 (23.0) (5.3)
------------------------------------------------- ----- ----------- -----------
Derivative financial instruments 18 26.7 6.2
------------------------------------------------- ----- ----------- -----------
Liabilities directly associated with assets held
for sale 19 - 2.0
------------------------------------------------- ----- ----------- -----------
Current tax liabilities 0.8 -
------------------------------------------------- ----- ----------- -----------
Lease liabilities 29 2.1 3.1
------------------------------------------------- ----- ----------- -----------
Other liabilities 30 78.1 31.3
------------------------------------------------- ----- ----------- -----------
Provisions for liabilities and charges 31 2.5 1.3
------------------------------------------------- ----- ----------- -----------
Subordinated liabilities 32 51.1 50.9
------------------------------------------------- ----- ----------- -----------
Total liabilities 3,053.4 2,583.5
------------------------------------------------- ----- ----------- -----------
Equity attributable to owners of the parent
------------------------------------------------- ----- ----------- -----------
Share capital 34 7.5 7.5
------------------------------------------------- ----- ----------- -----------
Share premium 82.2 82.2
------------------------------------------------- ----- ----------- -----------
Other reserves 35 (0.3) 1.0
------------------------------------------------- ----- ----------- -----------
Retained earnings 237.5 211.7
------------------------------------------------- ----- ----------- -----------
Total equity 326.9 302.4
------------------------------------------------- ----- ----------- -----------
Total liabilities and equity 3,380.3 2,885.9
------------------------------------------------- ----- ----------- -----------
Company statement of financial position
As at 31 December
2022 2021
Note GBPmillion GBPmillion
------------------------------------------------ ----- ----------- -----------
ASSETS
------------------------------------------------ ----- ----------- -----------
Cash and Bank of England reserve account 370.1 235.7
------------------------------------------------ ----- ----------- -----------
Loans and advances to banks 13 48.9 47.4
------------------------------------------------ ----- ----------- -----------
Debt securities 14 - 25.0
------------------------------------------------ ----- ----------- -----------
Loans and advances to customers 15,16 2,919.5 2,450.3
------------------------------------------------ ----- ----------- -----------
Fair value adjustment for portfolio hedged risk 18 (32.0) (3.5)
------------------------------------------------ ----- ----------- -----------
Derivative financial instruments 18 34.9 3.8
------------------------------------------------ ----- ----------- -----------
Investment property 20 1.0 5.7
------------------------------------------------ ----- ----------- -----------
Property, plant and equipment 21 4.7 3.7
------------------------------------------------ ----- ----------- -----------
Right-of-use assets 22 1.3 1.5
------------------------------------------------ ----- ----------- -----------
Intangible assets 23 4.4 5.4
------------------------------------------------ ----- ----------- -----------
Investments in group undertakings 24 5.7 4.3
------------------------------------------------ ----- ----------- -----------
Current tax assets - 1.5
------------------------------------------------ ----- ----------- -----------
Deferred tax assets 25 5.3 6.8
------------------------------------------------ ----- ----------- -----------
Other assets 26 15.1 99.8
------------------------------------------------ ----- ----------- -----------
Total assets 3,378.9 2,887.4
------------------------------------------------ ----- ----------- -----------
LIABILITIES AND EQUITY
------------------------------------------------ ----- ----------- -----------
Liabilities
------------------------------------------------ ----- ----------- -----------
Due to banks 27 400.5 390.8
------------------------------------------------ ----- ----------- -----------
Deposits from customers 28 2,514.6 2,103.2
------------------------------------------------ ----- ----------- -----------
Fair value adjustment for portfolio hedged risk 18 (23.0) (5.3)
------------------------------------------------ ----- ----------- -----------
Derivative financial instruments 18 26.7 6.2
------------------------------------------------ ----- ----------- -----------
Current tax liabilities 0.6 -
------------------------------------------------ ----- ----------- -----------
Lease liabilities 29 1.9 2.3
------------------------------------------------ ----- ----------- -----------
Other liabilities 30 85.9 43.8
------------------------------------------------ ----- ----------- -----------
Provisions for liabilities and charges 31 2.0 1.3
------------------------------------------------ ----- ----------- -----------
Subordinated liabilities 32 51.1 50.9
------------------------------------------------ ----- ----------- -----------
Total liabilities 3,060.3 2,593.2
------------------------------------------------ ----- ----------- -----------
Equity attributable to owners of the parent
------------------------------------------------ ----- ----------- -----------
Share capital 34 7.5 7.5
------------------------------------------------ ----- ----------- -----------
Share premium 82.2 82.2
------------------------------------------------ ----- ----------- -----------
Other reserves 35 (1.1) 0.4
------------------------------------------------ ----- ----------- -----------
Retained earnings 230.0 204.1
------------------------------------------------ ----- ----------- -----------
Total equity 318.6 294.2
------------------------------------------------ ----- ----------- -----------
Total liabilities and equity 3,378.9 2,887.4
------------------------------------------------ ----- ----------- -----------
Consolidated statement of changes in equity
Other reserves
--------------------------- ----------- ----------- ------------------------------------- ----------- -----------
Cash
flow
Share Share hedge Revaluation Own Retained
capital premium reserve reserve shares earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2021 7.5 82.2 - 0.9 - 177.0 267.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Profit for 2021 - - - - - 45.6 45.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income,
net of income tax
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash flow hedge reserve
movements - - (0.4) - - - (0.4)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on cash flow hedge
reserve
movements - - 0.1 - - - 0.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revaluation during the year _ _ - 0.5 - - 0.5
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve
movements - - - (0.1) - - (0.1)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive
income - - (0.3) 0.4 - - 0.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year - - (0.3) 0.4 - 45.6 45.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Transactions with owners,
recorded
directly in equity
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Contributions by and
distributions
to owners
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends - - - - - (11.9) (11.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - - - 1.0 1.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total contributions by and
distributions
to owners - - - - - (10.9) (10.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2021 7.5 82.2 (0.3) 1.3 - 211.7 302.4
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Profit for 2022 - - - - - 33.7 33.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income,
net of income tax
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash flow hedge reserve
movements - - (0.7) - - - (0.7)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on cash flow hedge
reserve
movements - - 0.2 - - - 0.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revaluation during the year - - - 0.1 - - 0.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revaluation transfer - - - (0.8) - 0.8 -
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve
movements - - - 0.2 - - 0.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive
income - - (0.5) (0.5) - 0.8 (0.2)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year - - (0.5) (0.5) - 34.5 33.5
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Transactions with owners,
recorded
directly in equity
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Contributions by and
distributions
to owners
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Purchase of own shares - - - - (0.3) - (0.3)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends - - - - - (10.7) (10.7)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - - - 2.0 2.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total contributions by and
distributions
to owners - - - - (0.3) (8.7) (9.0)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2022 7.5 82.2 (0.8) 0.8 (0.3) 237.5 326.9
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Company statement of changes in equity
Other reserves
-------------------------------------
Cash
flow
Share Share hedge Revaluation Own Retained
capital premium reserve reserve shares earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2021 7.5 82.2 - 0.7 169.2 259.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Profit for 2021 - - - - - 45.8 45.8
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income,
net of income tax
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash flow hedge reserve
movements - - (0.4) - - - (0.4)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on cash flow hedges
reserve
movements - - 0.1 - - - 0.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive
income - - (0.3) - - - (0.3)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year - - (0.3) - - 45.8 45.5
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Transactions with owners,
recorded
directly in equity
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Contributions by and
distributions
to owners
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends - - - - - (11.9) (11.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - - - 1.0 1.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total contributions by and
distributions
to owners - - - - - (10.9) (10.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2021 7.5 82.2 (0.3) 0.7 - 204.1 294.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Profit for 2022 - - - - - 33.8 33.8
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income,
net of income tax
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cash flow hedge reserve
movements - - (0.7) - - - (0.7)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on cash flow hedge
reserve
movements - - 0.2 - - - 0.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revaluation transfer - - - (0.8) - 0.8 -
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve
movements - - - 0.1 - - 0.1
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive
income - - (0.5) (0.7) - 0.8 (0.4)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for
the year - - (0.5) (0.7) - 34.6 33.4
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Transactions with owners,
recorded
directly in equity
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Contributions by and
distributions
to owners
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Own shares - - - - (0.3) - (0.3)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends - - - - - (10.7) (10.7)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - - - 2.0 2.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total contributions by and
distributions
to owners - - - - (0.3) (8.7) (9.0)
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2022 7.5 82.2 (0.8) - (0.3) 230.0 318.6
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Consolidated statement of cash flows
For the year ended 31 December
Restated
(1)
2022 2021
Note GBPmillion GBPmillion
--------------------------------------------------------- -------- ----------- -----------
Cash flows from operating activities
--------------------------------------------------------- -------- ----------- -----------
Profit for the year 33.7 45.6
--------------------------------------------------------- -------- ----------- -----------
Adjustments for:
--------------------------------------------------------- -------- ----------- -----------
Income tax expense 9 10.3 10.4
--------------------------------------------------------- -------- ----------- -----------
Depreciation of property, plant and equipment 21 1.2 1.3
--------------------------------------------------------- -------- ----------- -----------
Depreciation of right-of-use assets 22 0.7 0.7
--------------------------------------------------------- -------- ----------- -----------
Amortisation of intangible assets 23 1.4 1.5
--------------------------------------------------------- -------- ----------- -----------
Loss on disposal of property, plant and equipment,
right of use assets and intangible assets 1.4 -
--------------------------------------------------------- -------- ----------- -----------
Impairment charge on loans and advances to customers 39.0 4.5
--------------------------------------------------------- -------- ----------- -----------
Share-based compensation 36 2.0 1.0
--------------------------------------------------------- -------- ----------- -----------
Revaluation gain 20,21,22 - (0.4)
--------------------------------------------------------- -------- ----------- -----------
(Gain)/loss on disposal of loan books 10 (8.9) 1.4
--------------------------------------------------------- -------- ----------- -----------
Other non-cash items included in profit before tax 1.0 (1.1)
--------------------------------------------------------- -------- ----------- -----------
Cash flows from operating profits before changes
in operating assets and liabilities 81.8 64.9
--------------------------------------------------------- -------- ----------- -----------
Changes in operating assets and liabilities:
--------------------------------------------------------- -------- ----------- -----------
- loans and advances to customers (497.1) (238.4)
--------------------------------------------------------- -------- ----------- -----------
- loans and advances to banks 0.6 (1.9)
--------------------------------------------------------- -------- ----------- -----------
- other assets (1.5) 6.0
--------------------------------------------------------- -------- ----------- -----------
- deposits from customers 411.4 110.7
--------------------------------------------------------- -------- ----------- -----------
- provisions for liabilities and charges (1.1) (0.7)
--------------------------------------------------------- -------- ----------- -----------
- other liabilities 45.6 (24.4)
--------------------------------------------------------- -------- ----------- -----------
Income tax paid (7.0) (12.6)
--------------------------------------------------------- -------- ----------- -----------
Net cash inflow/(outflow) from operating activities 32.7 (96.4)
--------------------------------------------------------- -------- ----------- -----------
Cash flows from investing activities
--------------------------------------------------------- -------- ----------- -----------
Consideration on sale of loan books 10 81.9 60.4
--------------------------------------------------------- -------- ----------- -----------
Sale of investment property 20 3.3 -
--------------------------------------------------------- -------- ----------- -----------
Maturity and sales of debt securities 80.0 90.0
--------------------------------------------------------- -------- ----------- -----------
Purchase of debt securities (80.0) (90.0)
--------------------------------------------------------- -------- ----------- -----------
Purchase of property, plant and equipment and intangible
assets 21, 23 (2.7) (1.3)
--------------------------------------------------------- -------- ----------- -----------
Net cash inflow from investing activities 82.5 59.1
--------------------------------------------------------- -------- ----------- -----------
Cash flows from financing activities
--------------------------------------------------------- -------- ----------- -----------
Drawdown of amounts due to banks 7.0 114.4
--------------------------------------------------------- -------- ----------- -----------
Purchase of own shares 35 (0.3) -
--------------------------------------------------------- -------- ----------- -----------
Dividends paid 12 (10.7) (11.9)
--------------------------------------------------------- -------- ----------- -----------
Repayment of lease liabilities 29 (1.0) (0.9)
--------------------------------------------------------- -------- ----------- -----------
Net cash (outflow)/inflow from financing activities (5.0) 101.6
--------------------------------------------------------- -------- ----------- -----------
Net increase in cash and cash equivalents 110.2 64.3
--------------------------------------------------------- -------- ----------- -----------
Cash and cash equivalents at 1 January 306.7 242.4
--------------------------------------------------------- -------- ----------- -----------
Cash and cash equivalents at 31 December 37 416.9 306.7
--------------------------------------------------------- -------- ----------- -----------
1. Cash and cash equivalents in the prior year have been
restated from GBP303.0 million to GBP306.7 million. See Note 1.3
for further details.
Company statement of cash flows
For the year ended 31 December
Restated
(1)
2022 2021
Note GBPmillion GBPmillion
--------------------------------------------------------- -------- ----------- -----------
Cash flows from operating activities
--------------------------------------------------------- -------- ----------- -----------
Profit for the year 33.8 45.8
--------------------------------------------------------- -------- ----------- -----------
Adjustments for:
--------------------------------------------------------- -------- ----------- -----------
Income tax expense 6.9 9.5
--------------------------------------------------------- -------- ----------- -----------
Depreciation of property, plant and equipment 21 0.7 0.8
--------------------------------------------------------- -------- ----------- -----------
Depreciation of right-of-use assets 22 0.4 0.5
--------------------------------------------------------- -------- ----------- -----------
Amortisation of intangible assets 23 1.1 1.2
--------------------------------------------------------- -------- ----------- -----------
Impairment charge on loans and advances to customers 37.8 2.7
--------------------------------------------------------- -------- ----------- -----------
Share-based compensation 36 1.6 0.8
--------------------------------------------------------- -------- ----------- -----------
Revaluation gain 20,21,22 - (0.4)
--------------------------------------------------------- -------- ----------- -----------
Dividends received from subsidiaries (14.0) (4.8)
--------------------------------------------------------- -------- ----------- -----------
Loss on disposal of loan books 10 - 1.4
--------------------------------------------------------- -------- ----------- -----------
Other non-cash items included in profit before tax 1.1 (1.0)
--------------------------------------------------------- -------- ----------- -----------
Cash flows from operating profits before changes
in operating assets and liabilities 69.4 56.5
--------------------------------------------------------- -------- ----------- -----------
Changes in operating assets and liabilities:
--------------------------------------------------------- -------- ----------- -----------
- loans and advances to customers (505.7) (244.1)
--------------------------------------------------------- -------- ----------- -----------
- loans and advances to banks 0.6 (1.9)
--------------------------------------------------------- -------- ----------- -----------
- other assets 26 98.7 11.7
--------------------------------------------------------- -------- ----------- -----------
- deposits from customers 411.4 110.7
--------------------------------------------------------- -------- ----------- -----------
- provisions for liabilities and charges (1.1) (0.8)
--------------------------------------------------------- -------- ----------- -----------
- other liabilities 44.0 (19.4)
--------------------------------------------------------- -------- ----------- -----------
Income tax paid (3.0) (11.1)
--------------------------------------------------------- -------- ----------- -----------
Net cash inflow/(outflow) from operating activities 114.3 (98.4)
--------------------------------------------------------- -------- ----------- -----------
Cash flows from investing activities
--------------------------------------------------------- -------- ----------- -----------
Consideration on sale of loan books 10 - 60.4
--------------------------------------------------------- -------- ----------- -----------
Sale of investment property 20 3.3 -
--------------------------------------------------------- -------- ----------- -----------
Purchase of subsidiary undertaking (1.0) -
--------------------------------------------------------- -------- ----------- -----------
Maturity and sales of debt securities 80.0 90.0
--------------------------------------------------------- -------- ----------- -----------
Purchase of debt securities (80.0) (90.0)
--------------------------------------------------------- -------- ----------- -----------
Purchase of property, plant and equipment and intangible
assets 21, 23 (0.4) (0.8)
--------------------------------------------------------- -------- ----------- -----------
Net cash inflow from investing activities 1.9 59.6
--------------------------------------------------------- -------- ----------- -----------
Cash flows from financing activities
--------------------------------------------------------- -------- ----------- -----------
Drawdown of amounts due to banks 7.0 114.4
--------------------------------------------------------- -------- ----------- -----------
Purchase of own shares 35 (0.3) -
--------------------------------------------------------- -------- ----------- -----------
Dividends paid 12 (10.7) (11.9)
--------------------------------------------------------- -------- ----------- -----------
Repayment of lease liabilities 29 (0.7) (0.7)
--------------------------------------------------------- -------- ----------- -----------
Net cash (outflow)/inflow from financing activities (4.7) 101.8
--------------------------------------------------------- -------- ----------- -----------
Net increase in cash and cash equivalents 111.5 63.0
--------------------------------------------------------- -------- ----------- -----------
Cash and cash equivalents at 1 January 303.8 240.8
--------------------------------------------------------- -------- ----------- -----------
Cash and cash equivalents at 31 December 37 415.3 303.8
--------------------------------------------------------- -------- ----------- -----------
1. Cash and cash equivalents in the prior year have been
restated from GBP300.1 million to GBP303.8 million. See Note 1.3
for further details.
Notes to the financial statements
1. Accounting policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below, and if
applicable, directly under the relevant note to the financial
statements. These policies have been consistently applied to all
the years presented, unless otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a public limited company incorporated
in England and Wales in the United Kingdom (referred to as
'the Company') and is limited by shares. The Company is
registered in England and Wales and has the registered number
00541132. The registered address of the Company is One Arleston
Way, Shirley, Solihull, West Midlands B90 4LH. The consolidated
financial statements of the Company as at and for the year ended 31
December 2022 comprise Secure Trust Bank PLC and its subsidiaries
(together referred to as 'the Group' and individually as
'subsidiaries'). The Group is primarily involved in the provision
of banking and financial services.
1.2. Basis of presentation
The figures shown for the year ended 31 December 2022 are not
statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for the year ended 31
December 2022 on which the auditors have given an unqualified audit
report and did not contain an adverse statement under section
498(2) or 498(3) of the Companies Act 2006 will be delivered to the
Registrar of Companies after the Annual General Meeting. The
figures shown for the year ended 31 December 2021 are not statutory
accounts. A copy of the statutory accounts has been delivered to
the Registrar of Companies, which contained an unqualified audit
report and did not contain an adverse statement under section
498(2) or 498(3) of the Companies Act 2006. This announcement has
been agreed with the Company's auditors for release.
1.3. Cash and cash equivalents prior year adjustment
During the year, the International Financial Reporting
Interpretations Committee ('IFRIC') issued a clarification of IAS 7
Statement of cash flows. IFRIC clarified that restrictions on use
of a demand deposit arising from a contract with a third party,
does not result in the deposit no longer being treated as cash,
unless those restrictions change the nature of the deposit in a way
that it would no longer meet the definition of cash in IAS 7.
In the prior year, GBP3.7 million (2020: GBP10.3 million) of
Loans and advances to banks was excluded from Group and Company
cash and cash equivalents. This comprised amounts over which the
Group and Company had a contractual obligation with a third party
to use the cash only for specified purposes. If the Group and
Company were to use these amounts for purposes other than those
agreed with the third party, the Group and Company would have been
in breach of its contractual obligation. However, the terms and
conditions did not prevent the Group and Company from accessing the
amounts held. As the Group and Company could still access the
amounts held, these amounts met the definition of cash.
Accordingly, as a result of the IFRIC clarification above, cash and
cash equivalents in the Cash flow statement have been restated as
follows:
2021 2020
--------------------------------------------- ---------------------------------------------
As originally Prior As originally Prior
stated year adjustment As restated stated year adjustment As restated
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------- ------------- ----------------- ----------- ------------- ----------------- -----------
Group
---------------------- ------------- ----------------- ----------- ------------- ----------------- -----------
Cash and cash
equivalents 303.0 3.7 306.7 232.1 10.3 242.4
---------------------- ------------- ----------------- ----------- ------------- ----------------- -----------
Company
---------------------- ------------- ----------------- ----------- ------------- ----------------- -----------
Cash and cash
equivalents 300.1 3.7 303.8 230.5 10.3 240.8
---------------------- ------------- ----------------- ----------- ------------- ----------------- -----------
The specific lines adjusted in the cash flow statement are
Changes in operating assets: loans and advances to banks and Net
cash flow from operating activities.
The effect on the current year is a increase in cash and cash
equivalents of GBP0.9 million.
1.4. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The
Group controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition, excluding directly attributable
costs, over the fair value of the Group's share of the identifiable
net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognised directly in the
income statement.
The parent company's investments in subsidiaries are recorded at
cost less, where appropriate, provision for impairment. The fair
value of the underlying business of the Company's only material
investment was significantly higher than carrying value, and
therefore no impairment was required.
Intercompany transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
Discontinued operations
Subsidiaries are de-consolidated from the date that control
ceases. Discontinued operations are a component of an entity that
has been disposed of and represents a major line of business and is
part of a single co-ordinated disposal plan.
1.5. Financial assets and financial liabilities accounting
policy
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
Group has transferred substantially all of the risks and rewards of
ownership or in the event of a substantial modification. There have
not been any instances where assets have only been partially
derecognised. The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled or expire.
Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, plus or minus the cumulative
amortisation using the effective interest rate ('EIR'), which is
the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument,
minus any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of
assets and liabilities traded in active markets are based on
current bid and offer prices respectively. If the market for a
financial instrument is not active the Group establishes a fair
value by using an appropriate valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis.
Financial assets (with the exception of derivative financial
instruments) accounting policy
The Group classifies its financial assets at inception into
three measurement categories; 'amortised cost', 'fair value through
other comprehensive income' ('FVOCI') and 'fair value through
profit or loss' ('FVTPL'). A financial asset is measured at
amortised cost if both the following conditions are met and it has
not been designated as at FVTPL:
-- the asset is held within a business model whose objective is
to hold the asset to collect its contractual cash flows; and
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
The Group's current business model for all financial assets,
with the exception of derivative financial instruments, is to hold
to collect contractual cash flows, and all assets held give rise to
cash flows on specified dates that represent solely payments of
principal and interest on the outstanding principal amount. All the
Group's financial assets are therefore currently classified as
amortised cost, except for derivative financial instruments. Loans
are recognised when funds are advanced to customers and are carried
at amortised cost using the EIR method.
A debt instrument would be measured at FVOCI only if both the
below conditions are met and it has not been designated as
FVTPL:
-- the asset is held within a business model whose objective is
achieved by both collecting its contractual cash flows and selling
the financial asset; and
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
The Group currently has no financial instruments classified as
FVOCI.
On initial recognition of an equity investment that is not held
for trading, the Group may irrevocably elect to present subsequent
changes in fair value in other comprehensive income. This election
would be made on an investment by investment basis. The Group
currently holds no such investments.
All other assets are classified as FVTPL.
Financial assets are not reclassified subsequent to their
initial recognition, except in the period after the Group changes
its business model for managing financial assets. The Group has not
reclassified any financial assets during the reporting period.
Financial liabilities (with the exception of derivative
financial instruments)
The Group classifies its financial liabilities as measured at
amortised cost. Such financial liabilities are recognised when cash
is received from depositors and carried at amortised cost using the
EIR method.
1.6. Foreign currencies
Transactions in foreign currencies are initially recorded at the
rates of exchange prevailing on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are retranslated into the Company's functional currency at the
rates prevailing on the balance sheet date. Exchange differences
arising on the settlement of monetary items, and on the
retranslation of monetary items, are included in the income
statement for the period.
2. Critical accounting judgements and key sources of estimation
uncertainty
2.1. Judgements
A critical judgement for 2022 is disclosed in Note 17.2. No
critical judgements were identified in 2021.
2.2. Key sources of estimation uncertainty
Estimations which could have a material impact on the Group's
financial results and are therefore considered to be key sources of
estimation uncertainty all relate to allowances for impairment of
loans and advances and are therefore set out in Note 17.1.
3. Operating segments
The Group was organised into seven operating segments, which
consisted of the different products available, as disclosed
below.
During the current year, the Group disposed of the Debt
Management loan book and the Asset Finance and Consumer Mortgages
loan books were sold during 2021. Although these were disclosed in
continuing operations in the prior year, the Directors have
reassessed this judgement and concluded that on the basis they have
been previously presented as separate business segments, and
discussed as part of the Strategic Report, it has been deemed
appropriate to include these as discontinued operations, and as
such comparatives have been re-presented on this basis.
Accordingly, the results of all of the above businesses are now
included in discontinued operations. As a result, going forward,
the Group is now organised into four operating segments: Real
Estate Finance, Commercial Finance, Vehicle Finance and Retail
Finance.
Continuing operations
Consumer Finance
-- Vehicle Finance: hire purchase lending for used cars to prime
and near-prime customers and Personal Contract Purchase lending
into the consumer prime credit market, both secured against the
vehicle financed. In addition a Stocking Funding product is also
offered whereby funds are advanced and secured against dealer
forecourt used car stock; sourced from auctions, part exchanges or
trade sources.
-- Retail Finance: a market leading online e-commerce service to
retailers, providing unsecured lending products to prime UK
customers to facilitate the purchase of a wide range of consumer
products including bicycles, music, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and football
season tickets.
Business Finance
-- Real Estate Finance: lending secured against property assets
to a maximum 70% loan-to-value ratio, on fixed or variable rates
over a term of up to five years.
-- Commercial Finance: lending is predominantly against
receivables, typically releasing 90% of qualifying invoices under
invoice discounting facilities. Other assets can also be funded
either long or short-term and for a range of loan-to-value ratios
alongside these services. Additional lending to existing customers
through the Government guaranteed Coronavirus Business Interruption
Loan Scheme, Coronavirus Large Business Interruption Loan Scheme
and Recovery Loan Scheme is also provided.
Other
-- This principally includes interest receivable from central
banks, interest receivable on derivatives and property rental
income.
Discontinued operations
-- Debt Management: a credit management services business which
primarily invests in purchased debt portfolios from third parties,
as well as fellow group undertakings. The Debt Management loan book
was sold during 2022.
-- Consumer Mortgages: mortgages for the self-employed, contract
workers, those with complex income and those with a recently
restored credit history, sold via select mortgage intermediaries,
which was sold during 2021.
-- Asset Finance: lending to small and medium sized enterprises
to acquire commercial assets, which was sold during 2021.
-- Other: includes products, which are individually below the
quantitative threshold for separate disclosure and fulfil the
requirement of IFRS 8.28 by reconciling operating segments to the
amounts in the financial statements. Other includes principally
OneBill (the Group's consumer bill management service), which was
closed during 2021 and RentSmart (the funding and operation of
finance leases through a disclosed agency agreement with RentSmart
Limited), which was sold during 2022. Assets and liabilities in
respect of the RentSmart business were included in Assets and
liabilities held for sale as at 31 December 2021 (see Note 19 for
further details).
Asset Finance, Debt Management and Consumer Mortgages segments
all fell below the quantitative threshold for separate disclosure,
but the Directors considered that they represented sufficiently
distinct types of business to merit separate disclosure.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers.
Net impairment
Interest charge
income Fee and Revenue on loans Loans
and similar commission from external and advances and advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------- ------------ ----------- -------------- -------------- -------------
31 December 2022
----------------------- ------------ ----------- -------------- -------------- -------------
Retail Finance 74.4 3.6 78.0 14.8 1,054.5
----------------------- ------------ ----------- -------------- -------------- -------------
Vehicle Finance 46.6 1.4 48.0 21.3 373.1
----------------------- ------------ ----------- -------------- -------------- -------------
Debt Management 5.3 4.1 9.4 0.8 -
----------------------- ------------ ----------- -------------- -------------- -------------
Consumer Finance 126.3 9.1 135.4 36.9 1,427.6
----------------------- ------------ ----------- -------------- -------------- -------------
Real Estate Finance 57.4 0.3 57.7 1.3 1,115.5
----------------------- ------------ ----------- -------------- -------------- -------------
Commercial Finance 17.5 11.8 29.3 0.8 376.4
----------------------- ------------ ----------- -------------- -------------- -------------
Business Finance 74.9 12.1 87.0 2.1 1,491.9
----------------------- ------------ ----------- -------------- -------------- -------------
Other 7.1 0.3 7.4 - -
----------------------- ------------ ----------- -------------- -------------- -------------
208.3 21.5 229.8 39.0 2,919.5
----------------------- ------------ ----------- -------------- -------------- -------------
Of which:
----------------------- ------------ ----------- -------------- -------------- -------------
Continuing 203.0 17.4 220.4 38.2 2,919.5
----------------------- ------------ ----------- -------------- -------------- -------------
Discontinued (Note 10) 5.3 4.1 9.4 0.8 -
----------------------- ------------ ----------- -------------- -------------- -------------
Net impairment Loans
Interest charge/(credit) and advances
income Fee and Revenue on loans to
and similar commission from external and advances customers
income income customers to customers (1)
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------- ------------ ----------- -------------- ---------------- -------------
31 December 2021
----------------------- ------------ ----------- -------------- ---------------- -------------
Retail Finance 65.0 2.7 67.7 5.0 764.8
----------------------- ------------ ----------- -------------- ---------------- -------------
Vehicle Finance 38.0 1.3 39.3 0.1 263.3
----------------------- ------------ ----------- -------------- ---------------- -------------
Debt Management 14.3 0.3 14.6 (0.6) 79.6
----------------------- ------------ ----------- -------------- ---------------- -------------
Consumer Mortgages 1.3 - 1.3 - -
----------------------- ------------ ----------- -------------- ---------------- -------------
Consumer Finance 118.6 4.3 122.9 4.5 1,107.7
----------------------- ------------ ----------- -------------- ---------------- -------------
Real Estate Finance 54.5 0.3 54.8 0.1 1,109.6
----------------------- ------------ ----------- -------------- ---------------- -------------
Asset Finance 0.3 - 0.3 0.1 -
----------------------- ------------ ----------- -------------- ---------------- -------------
Commercial Finance 8.8 8.6 17.4 (0.2) 313.3
----------------------- ------------ ----------- -------------- ---------------- -------------
Business Finance 63.6 8.9 72.5 - 1,422.9
----------------------- ------------ ----------- -------------- ---------------- -------------
Other (2.2) 1.1 (1.1) - 1.3
----------------------- ------------ ----------- -------------- ---------------- -------------
180.0 14.3 194.3 4.5 2,531.9
----------------------- ------------ ----------- -------------- ---------------- -------------
Of which:
----------------------- ------------ ----------- -------------- ---------------- -------------
Continuing 163.9 13.3 177.2 5.0 2,451.0
----------------------- ------------ ----------- -------------- ---------------- -------------
Discontinued (Note 10) 16.1 1.0 17.1 (0.5) 80.9
----------------------- ------------ ----------- -------------- ---------------- -------------
1. Includes Assets held for Sale of GBP1.3 million within Other
and Discontinued.
Interest expense and similar charges, fee and commission expense
and operating expenses are not aligned to operating segments for
day-to-day management of the business, so they cannot be allocated
on a reliable basis. Accordingly, profit by operating segment has
not been disclosed. Furthermore, no balance sheet items are
allocated to segments other than loans and advances to
customers.
All of the Group's operations are conducted wholly within the
United Kingdom and geographical information is therefore not
presented.
4. Operating income
All items below arise from financial instruments measured at
amortised cost unless otherwise stated.
4.1 Net interest income
2022 2021
GBPmillion GBPmillion
-------------------------------------------------------------- ----------- -----------
Loans and advances to customers 201.1 182.0
-------------------------------------------------------------- ----------- -----------
Cash and Bank of England reserve account 4.6 0.2
-------------------------------------------------------------- ----------- -----------
Debt securities 0.1 -
-------------------------------------------------------------- ----------- -----------
205.8 182.2
-------------------------------------------------------------- ----------- -----------
Income/(expense) on financial instruments hedging assets 2.5 (2.2)
-------------------------------------------------------------- ----------- -----------
Interest income and similar income 208.3 180.0
-------------------------------------------------------------- ----------- -----------
Of which:
-------------------------------------------------------------- ----------- -----------
Continuing 203.0 163.9
-------------------------------------------------------------- ----------- -----------
Discontinued (Note 10) 5.3 16.1
-------------------------------------------------------------- ----------- -----------
Deposits from customers (38.4) (27.3)
-------------------------------------------------------------- ----------- -----------
Due to banks (5.7) (0.3)
-------------------------------------------------------------- ----------- -----------
Subordinated liabilities (3.4) (3.4)
-------------------------------------------------------------- ----------- -----------
Other (0.1) -
-------------------------------------------------------------- ----------- -----------
(47.6) (31.0)
-------------------------------------------------------------- ----------- -----------
(Expense)/income on financial instruments hedging liabilities (3.6) 1.8
-------------------------------------------------------------- ----------- -----------
Interest expense and similar charges (51.2) (29.2)
-------------------------------------------------------------- ----------- -----------
Of which:
-------------------------------------------------------------- ----------- -----------
Continuing (50.4) (27.7)
-------------------------------------------------------------- ----------- -----------
Discontinued (Note 10) (0.8) (1.5)
-------------------------------------------------------------- ----------- -----------
Interest income and expense accounting policy
For all financial instruments measured at amortised cost, the
EIR method is used to measure the carrying value and allocate
interest income or expense. The EIR is the rate that exactly
discounts estimated future cash payments or receipts through the
expected life of the financial instrument to:
-- the gross carrying amount of the financial asset; or
-- the amortised cost of the financial liability.
In calculating the EIR for financial instruments, other than
assets that were credit-impaired on initial recognition, the Group
estimates cash flows considering all contractual terms of the
financial instrument (for example, early redemption penalty charges
and broker commissions) and anticipated customer behaviour but does
not consider future credit losses. For financial assets that were
impaired on initial recognition (also referred to as purchased or
originated credit-impaired assets - 'POCI'), a credit adjusted EIR
is calculated using estimated future cash flows, including expected
credit losses.
The calculation of the EIR includes all fees received and paid
that are an integral part of the EIR, transaction costs and all
other premiums or discounts. Transaction costs include incremental
costs that are directly attributable to the acquisition or issue of
a financial instrument.
For financial assets that are not considered to be
credit-impaired ('stage 1' and 'stage 2' assets), interest income
is recognised by applying the EIR to the gross carrying amount of
the financial asset. For financial assets that become
credit-impaired subsequent to initial recognition ('stage 3'
assets), from the next reporting period onwards interest income is
recognised by applying the EIR to the amortised cost of the
financial asset. The credit risk of financial assets that become
credit-impaired are not expected to improve such that they are no
longer considered credit-impaired, however, if this were to occur
the calculation of interest income would revert back to the gross
basis. The Group's definition of stage 1, stage 2 and stage 3
assets is set out in Note 17.
For financial assets that were credit-impaired on initial
recognition ('POCI' assets), income is calculated by applying the
credit adjusted EIR to the amortised cost of the asset. Collection
activity costs are not included in the amortised cost of the assets
but are included in operating expenses in the income statement, and
are recognised as incurred, in common with other businesses in the
sector. For such financial assets the calculation of interest
income will never revert to a gross basis, even if the credit risk
of the asset improves.
Further details regarding when an asset becomes credit-impaired
subsequent to initial recognition is provided within Note 17.
4.2 Net fee and commission income
2022 2021
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Fee and disbursement income 19.8 12.5
---------------------------------------- ----------- -----------
Commission income 1.4 1.2
---------------------------------------- ----------- -----------
Other income 0.3 0.6
---------------------------------------- ----------- -----------
Fee and commission income 21.5 14.3
---------------------------------------- ----------- -----------
Of which:
---------------------------------------- ----------- -----------
Continuing 17.4 13.3
---------------------------------------- ----------- -----------
Discontinued (Note 10) 4.1 1.0
---------------------------------------- ----------- -----------
Other expenses (0.4) (0.6)
---------------------------------------- ----------- -----------
Fee and commission expense (Continuing) (0.4) (0.6)
---------------------------------------- ----------- -----------
Fees and commission income is all recognised under IFRS 15
Revenue from contracts to customers and consists principally of the
following:
-- Commercial Finance - discounting, service and arrangement fees.
-- Retail Finance - principally comprises of account management
fees received from customers and referral fees received from third
parties.
-- Vehicle Finance - primarily relates to vehicle collection and
damage charges made to customers and loan administration fees
charged to dealers in respect of the Stocking Funding product.
Fee and commission accounting policy
Fees and commission income that is not considered an integral
part of the EIR of a financial instrument are recognised under IFRS
15 when the Group satisfies performance obligations by transferring
promised services to customers and presented in the income
statement as fee and commission income.
Fees and commission income and expenses that are an integral
part of the EIR of a financial instrument are included in the EIR
and presented in the income statement as interest income or
expense.
No significant judgements are made in evaluating when a customer
obtains control of promised goods or services.
5. Gains on modification of financial assets
Although not included as an option within customer contracts,
following regulatory guidance the Group offered payment
holidays
to its Consumer Finance customers, which were not considered to
be substantial. This is considered under IFRS 9 as a modification
to contractual cash flows, which requires the carrying value of
these loans to be adjusted to the net present value of future cash
flows.
A small number of payment holidays were granted during 2021,
resulting in no further loan modification losses being
recognised.
The movement during the year in the net present value of the
loans remaining to be unwound as a result of the modification
was as follows:
2022 2022 2021 2021
Vehicle Retail 2022 Vehicle Retail 2021
Finance Finance Total Finance Finance Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Reduction in net present
value
------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 1 January 1.4 0.2 1.6 2.5 0.6 3.1
------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Credit to the income
statement (0.9) (0.2) (1.1) (1.1) (0.4) (1.5)
------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Balance remaining to
be unwound
at 31 December 0.5 - 0.5 1.4 0.2 1.6
------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Of the loan modification loss remaining, GBP0.3 million (2021:
GBP0.9 million) relates to financial assets with a loss allowance
based on lifetime Expected Credit Losses ('ECL').
Modification of loans accounting policy
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Substantial loan
modifications result in the derecognition of the existing loan, and
the recognition of a new loan at the new origination EIR based on
the expected future cash flows at origination. Determination of the
origination probability of default ('PD') for the new loan is
required, based on the PD as at the date of the modification, which
is used for the calculation of the impairment provision against the
new loan. Any deferred fees or deferred interest, and any
difference between the fair value of the derecognised loan and the
new loan, is written off to the income statement on recognition of
the new loan.
Where the modification is not considered to be substantial,
neither the origination EIR nor the origination probability of
default for the modified loan changes. The net present value of
changes to the future contractual cash flows adjusts the carrying
amount of the original asset with the difference immediately being
recognised in profit or loss. The adjusted carrying amount is then
amortised over the remaining term of the modified loan using the
original EIR.
6. Fair value losses on financial instruments
As a part of its risk management strategy, the Group uses
derivatives to economically hedge financial assets and liabilities.
For further information on the Group's risk management strategy for
market risk see page 30 of the Group's Strategic Report in the 2022
Annual Report and Accounts.
Hedge accounting is employed by the Group to minimise the
accounting volatility associated with the change in fair value of
derivative financial instruments. This volatility does not reflect
the economic reality of the Group's hedging strategy, the Group
only uses derivatives for the hedging of risks.
Hedge ineffectiveness recognised in losses from derivatives and
hedge accounting in the income statement is set out below:
2022 2021
GBPmillion GBPmillion
---------------------------------------------------------------- ----------- -----------
Fair value hedges
---------------------------------------------------------------- ----------- -----------
Fair value movement during the year - Interest rate derivatives (10.6) 0.9
---------------------------------------------------------------- ----------- -----------
Fair value movement during the year - Hedged items 10.9 (0.8)
---------------------------------------------------------------- ----------- -----------
Ineffective portion of hedges 0.3 0.1
---------------------------------------------------------------- ----------- -----------
The loss recognised in other comprehensive income during the
year is as follows:
2022 2021
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Cash flow hedges
--------------------------------------------------------- ----------- -----------
Fair value movement in year - Interest rate derivatives 0.8 0.4
--------------------------------------------------------- ----------- -----------
Interest reclassified to the income statement during the
year (0.1) -
--------------------------------------------------------- ----------- -----------
Fair value loss recognised in other comprehensive income 0.7 0.4
--------------------------------------------------------- ----------- -----------
Although the Group uses interest rate derivatives exclusively to
hedge interest rate risk exposures, income statement volatility can
still arise due to hedge accounting ineffectiveness or because
hedge accounting is not achievable. Where such volatility arises it
will net to zero over the life of the hedging relationship. All
derivatives held by the Group have been highly effective in the
year resulting in minimal hedge accounting ineffectiveness
recognised in the income statement. Future ineffectiveness may
arise as a result of:
-- differences between the expected and actual volume of
prepayments, as the Group hedges to the expected repayment date
taking into account expected prepayments based on past experience;
or
-- differences in the timing of cash flows for the hedged item and the hedging instrument.
How fair value and cash flow hedge accounting affect the
financial statements and the main sources of the residual hedge
ineffectiveness remaining in the income statement are set out
below. Further information on the current derivative portfolio and
the allocation to hedge accounting types is included in Note
18.
Derivative financial instruments accounting policy
The Group enters into derivatives to manage exposures to
fluctuations in interest rates. Derivatives are not used for
speculative purposes. Derivatives are carried at fair value with
movements in fair value recognised in the income statement or other
comprehensive income. Derivatives are valued by discounted cash
flow models using yield curves based on overnight indexed swap
('OIS') rates. All derivatives are carried as assets where fair
value is positive and as liabilities when fair value is negative.
Derivatives are not offset in the financial statements unless the
Group has both a legally enforceable right and intention to
offset.
The Group does not hold contracts containing embedded
derivatives.
Where cash collateral is received, to mitigate the risk inherent
in the amounts due to the Group, it is included as a liability
within the due to banks line within the statement of financial
position. Where cash collateral is given, to mitigate the risk
inherent in amounts due from the Group, it is included as an asset
in the loans and advances to banks line within the statement of
financial position.
Hedge accounting
Following transition to IFRS 9, the Group has elected to apply
IAS 39 for all of its hedge accounting requirements. When
transactions meet specified criteria the Group can apply two types
of hedge accounting:
-- Hedges of the fair value of recognised assets or liabilities
or firm commitments (fair value hedges).
-- Hedges of highly probable future cash flows attributable to a
recognised asset or liability (cash flow hedges).
The Group does not have hedges of net investments.
At inception of a hedge, the Group formally documents the
relationship between the hedged items and hedging instruments, as
well as its risk management objective and strategy for undertaking
various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values of the hedged
items (i.e. the fair value offset between the hedged item and
hedging instrument is within the 80% -125% range).
When the European Union adopted IAS 39 in 2004, it removed
certain hedge accounting requirements, commonly referred
to as the EU carve-out. The relaxed requirements under the
carve-out allow the Group to apply the 'bottom up' method
when calculating macro-hedge ineffectiveness. This option is not
allowed under full IFRS. The Group has applied the EU
carve-out accordingly.
Fair value hedge accounting
Fair value hedge accounting results in the carrying value of the
hedged item being adjusted to reflect changes in fair value
attributable to the hedged risk, thereby offsetting the effect of
the related movement in the fair value of the derivative. Changes
in the fair value of derivatives and hedged items that are
designated and qualify as fair value hedges are recorded in the
income statement.
In a one-to-one hedging relationship in which a single
derivative hedges a single hedged item, the carrying value of the
underlying asset or liability (the hedged item) is adjusted for the
hedged risk to offset the fair value movement of the related
derivative. In the case of a portfolio hedge, an adjustment is
included in the fair value adjustments for portfolio hedged risk
line in the statement of financial position to offset the fair
value movements in the related derivative. The Group currently only
designates portfolio hedges.
If the hedge no longer meets the criteria for hedge accounting,
expires or is terminated, the cumulative fair value adjustment to
the carrying amount of a hedged item is amortised to the income
statement over the period to maturity of the previously designated
hedge relationship and recorded as net interest income. If the
underlying item is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the income statement.
Cash flow hedge accounting
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges are
recognised in other comprehensive income and presented in the cash
flow hedge reserve in equity. Any ineffective portion of changes in
the fair value of the derivative is recognised immediately in the
income statement. Amounts recognised in the cash flow hedge reserve
are subsequently reclassified to the income statement when the
underlying asset or liability being hedged impacts the income
statement, for example when interest payments are recognised, and
are recorded in the same income statement line in which the income
or expense associated with the related hedged item is reported.
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in equity at that time remains in equity and is
recognised in the periods when the hedged item affects the income
statement. When a forecast transaction is no longer expected to
occur (for example, the recognised hedged item is disposed of), the
cumulative gain or loss previously recognised in other
comprehensive income is immediately reclassified to the income
statement.
The cash flow hedge reserve represents the cumulative amount of
gains and losses on hedging instruments deemed effective in cash
flow hedges. The cumulative deferred gain or loss on the hedging
instrument is recognised in profit or loss only when the hedged
transaction impacts the profit or loss or is included directly in
the initial cost or other carrying amount of the hedged
non-financial items (basis adjustment).
7. Operating expenses
2022 2021
GBPmillion GBPmillion
-------------------------------------------------------- ----------- -----------
Employee costs, including those of Directors:
-------------------------------------------------------- ----------- -----------
Wages and salaries 47.9 47.4
-------------------------------------------------------- ----------- -----------
Social security costs 5.7 5.8
-------------------------------------------------------- ----------- -----------
Pension costs 2.1 2.0
-------------------------------------------------------- ----------- -----------
Share-based payment transactions 1.8 0.9
-------------------------------------------------------- ----------- -----------
Depreciation of property, plant and equipment (Note 21) 1.2 1.3
-------------------------------------------------------- ----------- -----------
Depreciation of lease right-of-use assets (Note 22) 0.7 0.7
-------------------------------------------------------- ----------- -----------
Amortisation of intangible assets (Note 23) 1.4 1.5
-------------------------------------------------------- ----------- -----------
Operating lease rentals 0.7 0.6
-------------------------------------------------------- ----------- -----------
Other administrative expenses 40.6 43.8
-------------------------------------------------------- ----------- -----------
Total operating expenses 102.1 104.0
-------------------------------------------------------- ----------- -----------
Of which:
-------------------------------------------------------- ----------- -----------
Continuing 93.2 89.4
-------------------------------------------------------- ----------- -----------
Discontinued (Note 10) 8.9 14.6
-------------------------------------------------------- ----------- -----------
As described in Note 3, operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis.
Post-retirement obligations accounting policy
The Group contributes to defined contribution schemes for the
benefit of certain employees. The schemes are funded through
payments to insurance companies or trustee-administered funds at
the contribution rates agreed with individual employees. The Group
has no further payment obligations once the contributions have been
paid. The contributions are recognised as an employee benefit
expense when they are due. There are no post-retirement benefits
other than pensions.
Remuneration of the Auditor and its associates, excluding VAT,
was as follows:
2022 2021
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Fees payable to the Company's Auditor for the audit of
the Company's annual accounts 730 639
---------------------------------------------------------- -------- --------
Fees payable to the Company's Auditor for other services:
---------------------------------------------------------- -------- --------
The audit of the Company's subsidiaries, pursuant to
legislation 27 50
---------------------------------------------------------- -------- --------
Other assurance services 110 110
---------------------------------------------------------- -------- --------
867 799
---------------------------------------------------------- -------- --------
Other assurance services related to the Term Funding Scheme with
additional incentives for SMEs audit, Interim independent review
report and profit certification, and in 2022 a comfort letter in
relation to the Tier 2 capital issuance.
8. Average number of employees
Restated
2022 2021
Number Number
------------------------ ------- --------
Directors 8 8
------------------------ ------- --------
Other senior management 28 29
------------------------ ------- --------
Other employees 904 936
------------------------ ------- --------
940 973
------------------------ ------- --------
The definition of management at 31 December 2022 has changed to
include only senior management, whereas in the prior year
management included senior management and all employees who had
people management responsibilities. Accordingly the analysis of the
prior year employee numbers has been restated on a consistent
basis.
9. Income tax expense
2022 2021
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Current taxation
--------------------------------------------------------- ----------- -----------
Corporation tax charge - current year 8.4 11.2
--------------------------------------------------------- ----------- -----------
Corporation tax charge - adjustments in respect of prior
years 0.1 (0.5)
--------------------------------------------------------- ----------- -----------
8.5 10.7
--------------------------------------------------------- ----------- -----------
Deferred taxation
--------------------------------------------------------- ----------- -----------
Deferred tax charge - current year 1.9 (0.7)
--------------------------------------------------------- ----------- -----------
Deferred tax charge - adjustments in respect of prior
years (0.1) 0.4
--------------------------------------------------------- ----------- -----------
1.8 (0.3)
--------------------------------------------------------- ----------- -----------
Income tax expense 10.3 10.4
--------------------------------------------------------- ----------- -----------
Of which:
--------------------------------------------------------- ----------- -----------
Continuing 9.4 10.4
--------------------------------------------------------- ----------- -----------
Discontinued (Note 10) 0.9 -
--------------------------------------------------------- ----------- -----------
Tax reconciliation
--------------------------------------------------------- ----------- -----------
Profit before tax 44.0 56.0
--------------------------------------------------------- ----------- -----------
Tax at 19.00% (2021: 19.00%) 8.4 10.6
--------------------------------------------------------- ----------- -----------
Banking surcharge 0.1 1.4
--------------------------------------------------------- ----------- -----------
Rate change on deferred tax assets 1.2 (1.5)
--------------------------------------------------------- ----------- -----------
Prior year adjustments - (0.1)
--------------------------------------------------------- ----------- -----------
Deferred tax assets not recognised 0.2 -
--------------------------------------------------------- ----------- -----------
Other 0.4 -
--------------------------------------------------------- ----------- -----------
Income tax expense for the year 10.3 10.4
--------------------------------------------------------- ----------- -----------
There is a deferred tax charge in 2022 arising from a
reassessment of the tax rates at which the deferred tax asset would
reverse out in future periods, mainly arising from changes to the
banking surcharge. The main component of the deferred tax asset is
deferred tax on the IFRS 9 transition adjustment, which reverses on
a straight-line basis over ten years commencing in 2018. The
Finance Act 2022, enacted on 24 February 2022, included
legislation, confirmed in the Autumn Statement, to reduce the
banking surcharge to 3% on bank tax profits in excess of GBP100
million with effect from 1 April 2023.
The future tax rates used in 2021 had reflected the increase in
Corporation Tax from 19% to 25% with effect from 1 April 2023
legislated in June 2021. Those rates had continued to assume
banking surcharge of 8% on any taxable profits of Secure Trust Bank
PLC in excess of GBP25 million in an accounting period.
Income tax accounting policy
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits
arise.
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred
tax is determined using tax rates and laws that have been enacted
or substantially enacted by the statement of financial position
date and are expected to apply when the related deferred tax asset
is realised or the deferred tax liability is settled.
10. Discontinued operations
Discontinued businesses include Debt Management, Consumer
Mortgages and Asset Finance. The Asset Finance and Consumer
Mortgages loan books were sold during 2021. Although Asset Finance
and Consumer Mortgages were disclosed in continuing operations in
the prior year, the Directors have reassessed this judgement and
concluded that on the basis they have been previously presented as
separate business segments, and discussed as part of the Strategic
Report, it has been deemed appropriate to include these as
discontinued operations, and as such comparatives have been
re-presented on this basis.
On 11 March 2022 the Group announced that it had agreed to sell
Debt Managers (Services) Limited's ('DMS') portfolio of loans to
Intrum UK Finance Limited. The sale completed on 30 May 2022. As
the Group has exited this market, the results have presented this
as a discontinued business. As per the terms of the contract, the
Group received GBP81.9 million, for the carrying value of the loan
book at the date of sale of GBP71.8 million. Direct and indirect
costs incurred in relation to the sale amounted to GBP4.0
million.
2022 2021
Income statement GBPmillion GBPmillion
-------------------------------------------------------------- ----------- -----------
Interest income and similar income 5.3 16.1
-------------------------------------------------------------- ----------- -----------
Interest expense and similar charges (0.8) (1.5)
-------------------------------------------------------------- ----------- -----------
Net interest income 4.5 14.6
-------------------------------------------------------------- ----------- -----------
Fee and commission income 4.1 1.0
-------------------------------------------------------------- ----------- -----------
Net fee and commission income 4.1 1.0
-------------------------------------------------------------- ----------- -----------
Operating income 8.6 15.6
-------------------------------------------------------------- ----------- -----------
Net impairment (charge)/credit on loans and advances to
customers (0.8) 0.5
-------------------------------------------------------------- ----------- -----------
Overall profit/(loss) on disposal of loan portfolios (see
below) 6.1 (1.4)
-------------------------------------------------------------- ----------- -----------
Operating expenses (8.9) (14.6)
-------------------------------------------------------------- ----------- -----------
Profit before income tax from discontinued operations 5.0 0.1
-------------------------------------------------------------- ----------- -----------
Income tax expense (0.9) -
-------------------------------------------------------------- ----------- -----------
Profit for the year from discontinued operations 4.1 0.1
-------------------------------------------------------------- ----------- -----------
Basic earnings per ordinary share - discontinued operations 22.0 0.5
-------------------------------------------------------------- ----------- -----------
Diluted earnings per ordinary share - discontinued operations 21.3 0.5
-------------------------------------------------------------- ----------- -----------
Consumer Asset
DMS Mortgages Finance Total
2022 2021 2021 2021
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------------- ----------- ----------- ----------- -----------
Consideration received 81.9 54.6 5.8 60.4
-------------------------------------------------- ----------- ----------- ----------- -----------
Carrying value of loan books disposed (71.8) (54.5) (5.8) (60.3)
-------------------------------------------------- ----------- ----------- ----------- -----------
Selling costs (1.2) (0.6) (0.1) (0.7)
-------------------------------------------------- ----------- ----------- ----------- -----------
Profit/(loss) on disposal of loan book (including
selling costs) 8.9 (0.5) (0.1) (0.6)
-------------------------------------------------- ----------- ----------- ----------- -----------
Other closure costs (2.8) (0.8) - (0.8)
-------------------------------------------------- ----------- ----------- ----------- -----------
Overall profit/(loss) on disposal of loan
portfolio(s) 6.1 (1.3) (0.1) (1.4)
-------------------------------------------------- ----------- ----------- ----------- -----------
2022 2021
Net cash flows GBPmillion GBPmillion
-------------------------- ----------- -----------
Operating (82.6) (58.2)
-------------------------- ----------- -----------
Investing 81.9 60.4
-------------------------- ----------- -----------
Financing (0.1) (0.1)
-------------------------- ----------- -----------
Net cash (outflow)/inflow (0.8) 2.1
-------------------------- ----------- -----------
11. Earnings per ordinary share
11.1 Basic
Basic earnings per ordinary share are calculated by dividing the
profit attributable to equity holders of the parent by the weighted
average number of ordinary shares as follows:
2022 2021
----------------------------------------------------------------- ---------- ----------
Profit attributable to equity holders of the parent (GBPmillion) 33.7 45.6
----------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares (number) 18,672,650 18,637,444
----------------------------------------------------------------- ---------- ----------
Earnings per share (pence) 180.5 244.7
----------------------------------------------------------------- ---------- ----------
11.2 Diluted
Diluted earnings per ordinary share are calculated by dividing
the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the
year, as noted above, as well as the number of dilutive share
options in issue during the year, as follows:
2022 2021
--------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares 18,672,650 18,637,444
--------------------------------------------------------- ---------- ----------
Number of dilutive shares in issue at the year-end 617,340 407,729
--------------------------------------------------------- ---------- ----------
Fully diluted weighted average number of ordinary shares 19,289,990 19,045,173
--------------------------------------------------------- ---------- ----------
Dilutive shares being based on:
--------------------------------------------------------- ---------- ----------
Number of options outstanding at the year-end 1,206,639 949,193
--------------------------------------------------------- ---------- ----------
Weighted average exercise price (pence) 304 370
--------------------------------------------------------- ---------- ----------
Average share price during the year (pence) 1,040 1,103
--------------------------------------------------------- ---------- ----------
Diluted earnings per share (pence) 174.7 239.4
--------------------------------------------------------- ---------- ----------
12. Dividends
2022 2021
GBPmillion GBPmillion
------------------------------------------------------------- ----------- -----------
2022 interim dividend - 16.0 pence per share (paid September
2022) 3.0 -
------------------------------------------------------------- ----------- -----------
2021 final dividend - 41.1 pence per share (paid May 2022) 7.7 -
------------------------------------------------------------- ----------- -----------
2021 interim dividend - 20.0 pence per share (paid September
2021) - 3.7
------------------------------------------------------------- ----------- -----------
2020 final dividend - 44.0 pence per share (paid May 2021) - 8.2
------------------------------------------------------------- ----------- -----------
10.7 11.9
------------------------------------------------------------- ----------- -----------
The Directors recommend the payment of a final dividend of 29.1
pence per share (2021: 44.1 pence per share). The final dividend,
if approved by members at the Annual General Meeting, will be paid
on 25 May 2023 with an associated record date of 28 April 2023.
Dividends accounting policy
Final dividends on ordinary shares are recognised in equity in
the period in which they are approved by shareholders. Interim
dividends on ordinary shares are recognised in equity in the period
in which they are paid.
13. Loans and advances to banks
Moody's long-term ratings are as follows:
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- ----------- -----------
Aaa 3.7 - 3.7 -
----------------------------------------- ----------- ----------- ----------- -----------
A1 - A2 41.6 45.2 40.0 42.3
----------------------------------------- ----------- ----------- ----------- -----------
Arbuthnot Latham & Co. Limited - Unrated 5.2 5.1 5.2 5.1
----------------------------------------- ----------- ----------- ----------- -----------
50.5 50.3 48.9 47.4
----------------------------------------- ----------- ----------- ----------- -----------
None of the loans and advances to banks are either past due or
impaired. Loans and advances to banks includes GBP3.7 million
(2021: GBP2.6 million) which the Group and Company does not have
access to and are therefore excluded from cash and cash
equivalents. See Note 37.1 for a reconciliation to cash and cash
equivalents.
14. Debt securities
Group and Company
Debt securities consisted solely of sterling UK Government
Treasury Bills ('T-Bills'). The Group holds T-Bills from time to
time for liquidity risk management purposes. The Group's intention
is to hold the asset to collect its contractual cash flows of
principal and interest and, therefore, they are stated in the
statement of financial position at amortised cost. The number of
T-Bills held fell to GBPnil over the year, from GBP25 million.
All of the debt securities had a rating agency designation,
based on Moody's long-term ratings of Aa3 at 31 December 2021. None
of the debt securities were either past due or impaired.
The accounting policy for debt securities is included in Note
1.5 Financial assets and financial liabilities accounting
policy.
15. Loans and advances to customers
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- ----------- -----------
Gross loans and advances 2,997.5 2,598.1 2,997.5 2,511.2
----------------------------------------- ----------- ----------- ----------- -----------
Less: allowances for impairment of loans
and advances (Note 17) (78.0) (67.5) (78.0) (60.9)
----------------------------------------- ----------- ----------- ----------- -----------
2,919.5 2,530.6 2,919.5 2,450.3
----------------------------------------- ----------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 43. Loans and advances to customers includes finance lease
receivables of GBP371.2 million (2021: GBP284.6 million). See Note
16 for further details.
Group and Company
Retail Finance assets of GBP810.6 million (2021: GBP579.9
million) were pre-positioned under the Bank of England's liquidity
support operations and Term Funding Scheme with additional
incentives for SMEs and are available for use as collateral within
the schemes.
The Real Estate Finance loan book of GBP1,115.5 million (2021:
GBP1,109.6 million) is secured upon real estate, which had a
loan-to-value of 58% at 31 December 2022 (2021: 56%).
Under its credit policy, the Real Estate Finance business lends
to a maximum loan-to-value of:
-- 70% for investment loans;
-- 60% for residential development loans*;
-- 65% for certain residential higher leveraged development
loans*, which is subject to a overall cap on such lending agreed by
management according to risk appetite; and
-- 65% for commercial development loans*.
* based on gross development value
All property valuations at loan inception, and the majority of
development stage valuations, are performed by independent
Chartered Surveyors, who perform their work in accordance with the
Royal Institution of Chartered Surveyors Valuation - Professional
Standards.
GBP6.8 million of cash collateral has been received as at 31
December 2022 in respect of certain loans and advances
(2021: GBP3.5 million).
The accounting policy for loans and advances to customers is
included in Note 1.5 Financial assets and financial liabilities
accounting policy.
16. Finance lease receivables
Loans and advances to customers include finance lease
receivables as follows:
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------- ----------- ----------- ----------- -----------
Gross investment in finance lease receivables:
----------------------------------------------- ----------- ----------- ----------- -----------
- Not more than one year 157.6 137.1 157.6 135.9
----------------------------------------------- ----------- ----------- ----------- -----------
- Later than one year and no later than five
years 365.6 253.2 365.6 252.9
----------------------------------------------- ----------- ----------- ----------- -----------
523.2 390.3 523.2 388.8
----------------------------------------------- ----------- ----------- ----------- -----------
Unearned future finance income on finance
leases (152.0) (105.7) (152.0) (105.5)
----------------------------------------------- ----------- ----------- ----------- -----------
Net investment in finance leases 371.2 284.6 371.2 283.3
----------------------------------------------- ----------- ----------- ----------- -----------
The net investment in finance leases may
be analysed as follows:
----------------------------------------------- ----------- ----------- ----------- -----------
- Not more than one year 93.7 87.5 93.7 86.5
----------------------------------------------- ----------- ----------- ----------- -----------
- Later than one year and no later than five
years 277.5 197.1 277.5 196.8
----------------------------------------------- ----------- ----------- ----------- -----------
371.2 284.6 371.2 283.3
----------------------------------------------- ----------- ----------- ----------- -----------
Finance lease receivables include Vehicle Finance loans to
consumers, and in the prior year Asset Finance and the RentSmart
loan books.
Lessor accounting policy
The present value of the lease payments on assets leased to
customers under agreements which transfer substantially all the
risks and rewards of ownership, with or without ultimate legal
title, are recognised as a receivable. The difference between the
gross receivable and the present value of the receivable is
recognised as unearned finance income. Lease income is recognised
over the term of the lease using the net investment method, which
reflects a constant periodic rate of return.
17. Allowances for impairment of loans and advances
Group and Company
Not credit-impaired Credit-impaired
------------------------- ---------------
Stage
1: Stage Stage
Subject 2: 3: Gross
to Subject Subject loans
12-month to lifetime to lifetime Total and advances Provision
ECL ECL ECL provision to customers coverage
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
31 December 2022
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Consumer Finance:
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Retail Finance 12.7 9.8 5.7 28.2 1,082.7 2.6%
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Vehicle Finance:
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Voluntary termination provision 3.7 - - 3.7
Other impairment 7.3 16.4 17.0 40.7
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
11.0 16.4 17.0 44.4 417.5 10.6%
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Business Finance:
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Real Estate Finance 0.3 1.1 2.0 3.4 1,118.9 0.3%
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Commercial Finance 0.3 1.3 0.4 2.0 378.4 0.5%
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
24.3 28.6 25.1 78.0 2,997.5 2.6%
-------------------------------- ----------- ------------ --------------- ----------- ------------- ---------
Group
Not credit-impaired Credit-impaired
------------------------ ---------------
Stage Stage Stage
1: 2: 3:
Subject Subject Subject Gross
to to to loans
12-month lifetime lifetime Total and advances Provision
ECL ECL ECL provision to customers coverage
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
31 December 2021
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Consumer Finance:
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Retail Finance 10.0 7.6 4.1 21.7 786.5 2.8%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Vehicle Finance:
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Voluntary termination provision 4.2 - - 4.2
Other impairment 3.7 11.9 14.4 30.0
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
7.9 11.9 14.4 34.2 297.5 11.5%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Debt Management - - 7.3 7.3 86.9 8.4%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Business Finance:
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Real Estate Finance 0.1 0.4 2.7 3.2 1,112.8 0.3%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Commercial Finance 0.5 0.1 0.5 1.1 314.4 0.3%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
18.5 20.0 29.0 67.5 2,598.1 2.6%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
The impairment charge disclosed in the income statement can be
analysed as follows:
2022 2021
GBPmillion GBPmillion
-------------------------------------------------------- ----------- -----------
Expected credit losses: impairment charge 38.9 4.9
-------------------------------------------------------- ----------- -----------
Charge in respect of off balance sheet loan commitments 0.2 (0.2)
-------------------------------------------------------- ----------- -----------
Recoveries of loans written off (0.1) (0.2)
-------------------------------------------------------- ----------- -----------
39.0 4.5
-------------------------------------------------------- ----------- -----------
Of which:
-------------------------------------------------------- ----------- -----------
Continuing 38.2 5.0
-------------------------------------------------------- ----------- -----------
Discontinued (Note 10) 0.8 (0.5)
-------------------------------------------------------- ----------- -----------
Total provisions above include expert credit judgements as
follows:
2022 2021
GBPmillion GBPmillion
------------------------------------------------------------ ----------- -----------
Specific overlays held against credit-impaired secured
assets held within the Business Finance portfolio 0.7 (0.4)
------------------------------------------------------------ ----------- -----------
Management judgement in respect of:
------------------------------------------------------------ ----------- -----------
Consumer Finance affordability 2.5 4.6
------------------------------------------------------------ ----------- -----------
Vehicle Finance used car valuations 1.3 1.5
------------------------------------------------------------ ----------- -----------
Uncertainty over the future impact of the COVID-19 pandemic - 0.4
------------------------------------------------------------ ----------- -----------
POCI adjustment (see below) - 7.3
------------------------------------------------------------ ----------- -----------
Other (1.6) (0.1)
------------------------------------------------------------ ----------- -----------
Expert credit judgements over the IFRS 9 model results 2.9 13.3
------------------------------------------------------------ ----------- -----------
The specific overlays for Business Finance have been estimated
on an individual basis by assessing the recoverability and
condition of the secured asset, along with any other recoveries
that may be made.
For further details on Vehicle Finance used car valuations and
Consumer Finance affordability, see Notes 17.1.5 and 17.2.1
respectively.
POCI adjustment
During 2022, the Group sold the Debt Management loan book (See
Note 10). Prior to this the Group's debt management business
purchased credit-impaired loans from the Company and other
unrelated third parties. Under IFRS 9, these were classified as
Purchased and Originated Credit-Impaired ('POCI') loans. As a
practical expedient, income on POCI loans was initially recognised
by applying the original credit-adjusted EIR to the expected future
cash flows arising from the POCI assets. The Group's accounting
policy was to recognise POCI income by applying the original
credit-adjusted EIR to the amortised cost of the assets. Expected
changes in cash flows since the date of purchase were recognised as
an impairment gain or loss in the income statement. At 31 December
2021, reductions in credit quality resulted in a GBP7.3 million
impairment provision.
Reconciliations of the opening to closing allowance for
impairment of loans and advances are presented below:
Not credit-impaired Credit-impaired
------------------------- ---------------
Stage
1: Stage Stage
Subject 2: 3:
to Subject Subject
12-month to lifetime to lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ------------ --------------- -----------
At 1 January 2022 18.5 20.0 29.0 67.5
-------------------------------------------- ----------- ------------ --------------- -----------
(Decrease)/increase due to change in credit
risk
--------------------------------------------
- Transfer to stage 2 (8.8) 46.3 - 37.5
--------------------------------------------
- Transfer to stage 3 (0.4) (21.4) 29.5 7.7
--------------------------------------------
- Transfer to stage 1 2.3 (4.6) - (2.3)
--------------------------------------------
Passage of time (6.3) (0.7) (2.5) (9.5)
--------------------------------------------
New loans originated 23.2 - - 23.2
--------------------------------------------
Matured and derecognised loans (2.9) (3.8) (5.2) (11.9)
--------------------------------------------
Changes to credit risk parameters (2.9) (7.2) 1.9 (8.2)
--------------------------------------------
Other adjustments 2.4 - - 2.4
-------------------------------------------- ----------- ------------ --------------- -----------
Charge to income statement 6.6 8.6 23.7 38.9
-------------------------------------------- ----------- ------------ --------------- -----------
Allowance utilised in respect of write-offs (0.8) - (27.6) (28.4)
-------------------------------------------- ----------- ------------ --------------- -----------
31 December 2022 24.3 28.6 25.1 78.0
-------------------------------------------- ----------- ------------ --------------- -----------
During the year GBP8.1 million was utilised in respect of the
DMS book sale.
Not credit-impaired Credit-impaired
------------------------ ---------------
Stage Stage Stage
1: 2: 3:
Subject Subject Subject
to to to
12-month lifetime lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- --------------- -----------
At 1 January 2021 27.1 27.3 28.3 82.7
-------------------------------------------- ----------- ----------- --------------- -----------
(Decrease)/increase due to change in credit
risk
--------------------------------------------
- Transfer to stage 2 (5.3) 27.1 (0.2) 21.6
--------------------------------------------
- Transfer to stage 3 (0.1) (15.7) 20.6 4.8
--------------------------------------------
- Transfer to stage 1 2.9 (5.3) - (2.4)
--------------------------------------------
Passage of time (10.9) (6.7) (3.0) (20.6)
--------------------------------------------
New loans originated 18.2 - - 18.2
--------------------------------------------
Matured and derecognised loans (4.1) (4.1) - (8.2)
--------------------------------------------
Changes to model methodology (0.1) (0.2) 0.9 0.6
--------------------------------------------
Changes to credit risk parameters (8.0) (2.3) 0.7 (9.6)
--------------------------------------------
Other adjustments 0.5 - - 0.5
-------------------------------------------- ----------- ----------- --------------- -----------
Charge to income statement (6.9) (7.2) 19.0 4.9
-------------------------------------------- ----------- ----------- --------------- -----------
Allowance utilised in respect of write-offs (1.7) (0.1) (18.3) (20.1)
-------------------------------------------- ----------- ----------- --------------- -----------
31 December 2021 18.5 20.0 29.0 67.5
-------------------------------------------- ----------- ----------- --------------- -----------
During the prior year GBP1.6 million was utilised in respect of
the Asset Finance and Consumer Mortgage book sales.
The tables above have been prepared based on monthly movements
in the ECL.
Passage of time represents the impact of accounts maturing
through their contractual life, the associated reduction in PDs and
the unwind of the discount applied in calculating the ECL.
Changes to model methodology represent movements that have
occurred due to enhancements made to the models during
the year.
Changes to credit risk parameters represent movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macroeconomic scenarios
applied to the models.
Other adjustments represents the movement in the Vehicle Finance
voluntary termination provision.
Stage 1 write-offs arise on Vehicle Finance accounts where
borrowers have exercised their right to voluntarily terminate their
agreements.
A breakdown of the gross receivable by internal credit risk
rating is shown below:
2022 2021
------------------------------------------------- --------------------------------------------------
Stage Stage Stage Stage Stage Stage
1 2 3 Total 1 2 3 Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Business
Finance:
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Strong 127.5 - - 127.5 107.6 - - 107.6
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Good 962.4 28.5 - 990.9 915.8 26.6 - 942.4
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Satisfactory 195.7 125.7 1.8 323.2 179.7 138.2 5.2 323.1
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Weak - 40.2 15.5 55.7 - 14.1 40.0 54.1
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
1,285.6 194.4 17.3 1,497.3 1,203.1 178.9 45.2 1,427.2
------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Consumer Finance:
------------------ ------- ----- ---- ------- ----- ----- ----- -------
Good 601.5 77.6 6.0 685.1 360.3 95.7 5.3 461.3
------------------ ------- ----- ---- ------- ----- ----- ----- -------
Satisfactory 495.3 60.5 9.3 565.1 338.5 63.3 7.1 408.9
------------------ ------- ----- ---- ------- ----- ----- ----- -------
Weak 197.4 38.2 14.4 250.0 167.6 34.8 11.4 213.8
------------------ ------- ----- ---- ------- ----- ----- ----- -------
Debt Management - - - - - - 86.9 86.9
------------------ ------- ----- ---- ------- ----- ----- ----- -------
1,294.2 176.3 29.7 1,500.2 866.4 193.8 110.7 1,170.9
------------------ ------- ----- ---- ------- ----- ----- ----- -------
Internal credit risk rating is based on the most recent credit
risk score of a customer.
Company
The Company ECL by stage, gross balances and provision coverage
as at 31 December 2022 is now the same as Group.
For the Company disclosure, see the Group table on page 142 of
the 2022 Annual Report and Accounts.
Not credit-impaired Credit-impaired
------------------------ ---------------
Stage Stage Stage
1: 2: 3:
Subject Subject Subject Gross
to to to loans
12-month lifetime lifetime Total and advances Provision
ECL ECL ECL provision to customers coverage
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
31 December 2021
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Consumer Finance:
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Retail Finance 10.1 7.7 4.1 21.9 786.5 2.8%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Vehicle Finance:
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Voluntary termination provision 4.2 - - 4.2
Other impairment 3.7 12.1 14.7 30.5
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
7.9 12.1 14.7 34.7 297.5 11.7%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Business Finance:
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Real Estate Finance 0.1 0.4 2.7 3.2 1,112.8 0.3%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Commercial Finance 0.5 0.1 0.5 1.1 314.4 0.3%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
18.6 20.3 22.0 60.9 2,511.2 2.4%
-------------------------------- ----------- ----------- --------------- ----------- ------------- ---------
Reconciliations of the opening to closing allowance for
impairment of loans and advances are presented below:
Not credit-impaired Credit-impaired
------------------------- ---------------
Stage
1: Stage Stage
Subject 2: 3:
to Subject Subject
12-month to lifetime to lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ------------ --------------- -----------
At 1 January 2022 18.6 20.3 22.0 60.9
-------------------------------------------- ----------- ------------ --------------- -----------
(Decrease)/increase due to change in credit
risk
--------------------------------------------
- Transfer to stage 2 (8.8) 46.3 - 37.5
--------------------------------------------
- Transfer to stage 3 (0.4) (21.4) 29.5 7.7
--------------------------------------------
- Transfer to stage 1 2.3 (4.6) - (2.3)
--------------------------------------------
Passage of time (6.4) (1.0) (1.8) (9.2)
--------------------------------------------
New loans originated 23.2 - - 23.2
--------------------------------------------
Matured and derecognised loans (2.9) (3.8) (5.2) (11.9)
--------------------------------------------
Changes to credit risk parameters (2.9) (7.2) 1.0 (9.1)
--------------------------------------------
Other adjustments 2.4 - (0.2) 2.2
-------------------------------------------- ----------- ------------ --------------- -----------
Charge to income statement 6.5 8.3 23.3 38.1
-------------------------------------------- ----------- ------------ --------------- -----------
Allowance utilised in respect of write-offs (0.8) - (20.2) (21.0)
-------------------------------------------- ----------- ------------ --------------- -----------
31 December 2022 24.3 28.6 25.1 78.0
-------------------------------------------- ----------- ------------ --------------- -----------
Not credit-impaired Credit-impaired
------------------------ ---------------
Stage Stage Stage
1: 2: 3:
Subject Subject Subject
to to to
12-month lifetime lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- --------------- -----------
At 1 January 2021 28.2 29.0 22.7 79.9
-------------------------------------------- ----------- ----------- --------------- -----------
(Decrease)/increase due to change in credit
risk
--------------------------------------------
- Transfer to stage 2 (5.6) 28.6 (0.2) 22.8
--------------------------------------------
- Transfer to stage 3 (0.1) (16.5) 21.5 4.9
--------------------------------------------
- Transfer to stage 1 3.1 (5.6) - (2.5)
--------------------------------------------
Passage of time (12.5) (8.2) (4.7) (25.4)
--------------------------------------------
New loans originated 19.1 - - 19.1
--------------------------------------------
Matured and derecognised loans (4.3) (4.4) - (8.7)
--------------------------------------------
Changes to model methodology (0.1) (0.2) 0.9 0.6
--------------------------------------------
Changes to credit risk parameters (8.0) (2.3) 0.4 (9.9)
--------------------------------------------
Other adjustments 0.5 - (0.1) 0.4
-------------------------------------------- ----------- ----------- --------------- -----------
Charge to income statement (7.9) (8.6) 17.8 1.3
-------------------------------------------- ----------- ----------- --------------- -----------
Allowance utilised in respect of write-offs (1.7) (0.1) (18.5) (20.3)
-------------------------------------------- ----------- ----------- --------------- -----------
31 December 2021 18.6 20.3 22.0 60.9
-------------------------------------------- ----------- ----------- --------------- -----------
The tables above have been prepared based on monthly movements
in the ECL.
Passage of time represent the impact of accounts maturing
through their contractual life, the associated reduction in PDs
and
the unwind of the discount applied in calculating the ECL.
Changes to model methodology represent movements that have
occurred due to enhancements made to the models during
the year.
Changes to credit risk parameters represent movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macroeconomic scenarios
applied to the models.
Other adjustments represents the movement in the Vehicle Finance
voluntary termination provision.
Stage 1 write-offs arise on Vehicle Finance accounts that have
exercised their right to voluntarily terminate their
agreements.
Impairment of financial assets and loan commitments accounting
policy
The Group recognises loss allowances for Expected Credit Losses
('ECL') on all financial assets carried at amortised cost,
including lease receivables and loan commitments.
Stage 1 assets
Credit loss allowances are measured as an amount equal to
lifetime ECL, except for the following assets, for which they are
measured as 12-month ECL:
-- Financial assets determined to have low credit risk at the
reporting date.
-- Financial assets which have not experienced a significant
increase in credit risk since their initial recognition.
-- Financial assets which have experienced a significant
increase in credit risk since their initial recognition but have
subsequently met the Group's cure policy, as set out below.
A low credit risk asset is considered to have low credit risk
when its credit risk rating is equivalent to the widely understood
definition of 'investment grade' assets. This is not applicable to
loans and advances to customers, but the Group has assessed all its
debt securities, which represents UK Treasury bills, to be low
credit risk.
Stage 2 assets
Loans and advances to customers which have experienced a
significant increase in credit risk since their initial recognition
and have not subsequently met the Group's cure policy are
classified as stage 2 assets and are reclassified from stage 1 to
stage 2, for which ECL is measured as lifetime ECL.
The Group's definitions of a significant increase in credit risk
and default are set out below.
For Consumer Finance, the credit risk of a financial asset is
considered to have experienced a significant increase in credit
risk since initial recognition where there has been a significant
increase in the remaining lifetime probability of default of the
asset. The Group may also use its expert credit judgement and where
possible relevant historical and current performance data,
including bureau data, to determine that an exposure has undergone
a significant increase in credit risk.
For Business Finance, the credit risk of a financial asset is
considered to have experienced a significant increase in credit
risk where certain early warning indicators apply. These indicators
may include notification of county court judgements or,
specifically for the Real Estate Finance portfolio, cost over-runs
and timing delays experienced by borrowers.
As a backstop, the Group considers that a significant increase
in credit risk occurs no later than when an asset is more than 30
days past due for all portfolios.
Stage 3 assets
At each reporting date, the Group assesses whether financial
assets carried at amortised cost are credit-impaired or defaulted
(stage 3). A financial asset is considered to be credit-impaired
when an event or events that have a detrimental impact on estimated
future cash flows have occurred, or have other specific
unlikeliness to pay indicators. Evidence that a financial asset is
credit-impaired includes the following observable data:
-- Initiation of bankruptcy proceedings.
-- Notification of bereavement.
-- Identification of loan meeting debt sale criteria.
-- Initiation of repossession proceedings.
-- A material covenant breach that has remained unremedied for
more than 90 days.
In addition, a loan that is 90 days or more past due is
considered credit-impaired for all portfolios. The credit risk of
financial assets that become credit-impaired are not expected to
improve so they remain credit-impaired.
For Commercial Finance facilities that do not have a fixed term
or repayment structure, evidence that a financial asset is
credit-impaired includes:
-- the client ceasing to trade; or
unpaid debtor balances that are dated at least six months past
their normal recourse period.
Cure policy
The credit risk of a financial asset may improve such that it is
no longer considered to have experienced a significant increase in
credit risk if it meets the Group's cure policy. The Group's cure
policy for all portfolios requires sufficient payments to be made
to bring an account back within less than 30 days past due and for
such payments to be maintained for six consecutive months.
The Group has determined stage 3 to be an absorbing state. Once
a loan is in default it is not therefore expected to cure back to
stage 1 or 2.
Calculation of expected credit loss ('ECL')
ECL are probability weighted estimates of credit losses which
are measured as the present value of all cash shortfalls.
Specifically, this is the difference between the contractual cash
flows due and the cash flows expected to be received, discounted at
the original effective interest rate or, for portfolios purchased
outside of the Group by Debt Managers (Services) Limited, the
credit adjusted effective interest rate. For undrawn loan
commitments ECL is measured as the difference between the
contractual cash flows due if the commitment is drawn and the cash
flows expected to be received.
Lifetime ECL is the ECL that results from all possible default
events over the expected life of a financial asset.
12-month ECL is the portion of lifetime ECL that results from
default events on a financial asset that are possible within 12
months after the reporting date.
ECL are calculated by multiplying three main components: the
probability of default ('PD'), exposure at default and loss given
default ('LGD') discounted at the original effective interest rate
of an asset. These variables are derived from internally developed
statistical models and historical data, adjusted to reflect
forward-looking information and are discussed in turn further
below. Management adjustments are made to modelled output to
account for situations where known or expected risk factors have
not been reflected in the modelled outcome.
Probability of default ('PD') and credit risk grades
Credit risk grades are a primary input into the determination of
the PD for exposures. The Group allocates each exposure to a credit
risk grade at origination and at each reporting period to predict
the risk of default. Credit risk grades are determined using
qualitative and quantitative factors that are indicative of the
risk of default e.g. arrears status and loan applications scores.
These factors vary for each loan portfolio. Exposures are subject
to ongoing monitoring, which may result in an exposure being moved
to a different credit risk grade. In monitoring exposures
information such as payment records, request for forbearance
strategies and forecast changes in economic conditions are
considered for Consumer Finance. Additionally, for Business Finance
portfolios information obtained during periodic client reviews, for
example audited financial statements, management accounts, budgets
and projections are considered, with particular focus on key
ratios, compliance with covenants and changes in senior management
teams.
Exogenous, Maturity, Vintage ('EMV') modelling is used in the
production of forward-looking lifetime PDs. This method entails
modelling the effects of external (exogenous) factors against
cohorts of lending and their time on the books creating a clean
relationship to best demonstrate the movement in default rates as
macroeconomic variables are changed. These models are extrapolated
to provide PD estimates for the future, based on forecasted
economic scenarios.
Exposure at default ('EAD')
EAD represents the expected exposure in the event of a default.
EAD is derived from the current exposure and potential changes to
the current amount allowed under the terms of the contract,
including amortisation overpayments and early terminations. The EAD
of a financial asset is its gross carrying amount. For loan
commitments the EAD includes the amount drawn as well as potential
future amounts that may be drawn under the terms of the contract,
estimated based on historical observations and forward-looking
forecasts.
For Commercial Finance facilities that have no specific term, an
assumption is made that accounts close 36 months after the
reporting date for the purposes of measuring lifetime ECL. This
assumption is based on industry experience of average client life.
These facilities do not have a fixed term or repayment structure
but are revolving and increase or decrease to reflect the value of
the collateral i.e. receivables or inventory. The Group can cancel
the facilities with immediate effect, although this contractual
right is not enforced in the normal day-to-day management of the
facility. Typically, demand would only be made on the failure of a
client business or in the event of a material event of default,
such as a fraud. In the normal course of events, the Group's
exposure is recovered through receipt of remittances from the
client's debtors rather than from the client itself.
The ECL for such facilities is estimated taking into account the
credit risk management actions that the Group expects to take to
mitigate against losses. These include a reduction in advance rate
and facility limits or application of reserves against a facility
to improve the likelihood of full recovery of exposure from the
debtors.
Alternative recovery routes mitigating ECL would include
refinancing by another funding provider, taking security over other
asset classes or secured personal guarantees from the client's
principals.
Loss given default ('LGD')
LGD is the magnitude of the likely loss in the event of default.
This takes into account recoveries either through curing or, where
applicable, through auction sale of repossessed collateral and debt
sale of the residual shortfall amount. For loans secured by real
estate property, loan-to-value ratios are key parameters in
determining LGD. LGDs are calculated on a discounted cash flow
basis using the financial instrument's origination effective
interest rate as the discount factor.
Incorporation of forward-looking data
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of ECL. This is achieved by developing a number of
potential economic scenarios and modelling ECLs for each scenario.
To ensure material non-linear relationships between economic
factors and credit losses are reflected in the calculation of ECL,
a severe stress scenario is used as one of these scenarios. The
outputs from each scenario are combined using the estimated
likelihood of each scenario occurring to derive a probability
weighted expected credit loss. The four scenarios adopted and
probability weighting applied are set out below.
The Group considers that the key drivers of credit risk and
credit losses included in the macroeconomic scenarios are annual
unemployment rate growth and annual house price index growth. Base
case assumptions applied for each of these variables have been
sourced from external consensus or Bank of England forecasts.
Further details of the assumptions applied to other scenarios are
presented below.
Expert credit judgements
The impairment charge comprises of modelled ECLs and expert
credit judgements. Where the ECL modelled output does not reflect
the level of credit risk, judgement is used to calculate expert
credit judgements, which are overlaid onto the output from the
models.
Presentation of loss allowance
Loss allowances for ECLs and expert credit judgements are
presented in the statement of financial position as follows with
the loss recognised in the income statement:
-- Financial assets measured at amortised cost: as a deduction
from the gross carrying amount of the assets.
-- Other loan commitments: generally, as a provision.
For the Real Estate Finance and Commercial Finance portfolios,
where a loan facility is agreed that includes both drawn and
undrawn elements and the Group cannot identify the ECL on the loan
commitment separately, a combined loss allowance for both drawn and
undrawn components of the loan is presented as a deduction from the
gross carrying amount of the drawn component, with any excess of
the loss allowance over the gross drawn amount presented as a
provision.
When a loan is uncollectible, it is written off against the
related ECL allowance. Such loans are written off after all
necessary procedures have been completed and the amount of the loss
has been determined.
Vehicle Finance voluntary termination provision
In addition to recognising allowances for ECLs, the Group holds
a provision for voluntary terminations ('VT') for all Vehicle
Finance financial assets. VT is a legal right provided to customers
who take out hire purchase agreements. The provision is calculated
by multiplying the probability of VT of an asset by the expected
shortfall on VT discounted back at the original effective interest
rate of the asset. VT allowances are not held against loans in
default (stage 3 loans).
The VT provision is presented in the statement of financial
position as a deduction from the gross carrying amount of Vehicle
Finance assets with the loss recognised in the income
statement.
Write off
Loans and advances to customers are written off partially or in
full when the Group has exhausted all viable recovery options. The
majority of write-offs arise from Debt Relief Orders, insolvencies,
IVAs, deceased customers where there is no estate and vulnerable
customers in certain circumstances. Amounts subsequently recovered
on assets previously written off are recognised in the impairment
charge in the income statement.
Intercompany receivables
The parent company's expected credit loss on amounts due from
related companies, calculated by applying probability of default
and loss given default to the amount outstanding at the year-end,
was not material at 31 December 2022 or 31 December 2021.
17.1. Key sources of estimation uncertainty
Estimations which could have a material impact on the Group's
financial results and are therefore considered to be key sources of
estimation uncertainty all relate to the impairment charge on loans
and advances to customers and are therefore set out below. The
potential impact of the current macroeconomic environment has been
considered in determining reasonably possible changes in key
sources of estimation uncertainty which may occur in the next 12
months. The determination of both the PD and LGD require estimation
which is discussed further below.
17.1.1. Incorporation of forward-looking data
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of expected credit loss by developing a number of
potential economic scenarios and modelling expected credit losses
for each scenario. Further detail on this process is provided
above. The macroeconomic scenarios used were provided by external
economic advisors, having previously being internally developed
with regard to externally published scenarios. The scenarios and
weightings applied are summarised below:
December UK Unemployment Rate - Annual UK HPI - movement from December
2022 Average 2022
------------------------------------ -------------------------------------
2023 2024 2025 5 Yr Average 2023 2024 2025 5 Yr Average
Scenario Weightings % % % % % % % %
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Upside 20% 4.1 4.0 3.8 3.8 (5.2) (6.3) (2.0) 1.9
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Base 50% 4.4 4.4 4.0 4.1 (8.4) (11.4) (9.2) 0.4
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Downside 25% 5.4 6.5 7.1 6.5 (14.6) (21.3) (23.5) (2.6)
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Severe 5% 5.6 7.0 7.6 6.9 (19.2) (28.8) (34.3) (5.2)
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
December UK Unemployment Rate - Annual UK HPI - movement from December
2021 Average 2021
------------------------------------ -------------------------------------
2022 2023 2024 5 Yr Average 2022 2023 2024 5 Yr Average
Scenario Weightings % % % % % % % %
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Upside 20% 4.1 4.0 4.0 4.0 0.8 3.9 8.1 8.3
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Base 50% 4.9 4.4 4.2 4.3 1.0 1.9 3.9 4.9
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Downside 25% 5.7 5.6 4.8 4.9 (3.0) (1.9) 2.1 2.7
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
Severe 5% 6.8 8.3 6.8 6.3 (10.7) (11.2) (7.2) (6.2)
------------ ------------ ------ ------ ------ ------------ ------- ------ ------ ------------
The sensitivity of the ECL allowance to reasonably possible
changes in scenario weighting is presented below:
Increase in
downside case Increase in severe
weighting by stress case
10% and reduction weighting by
in 5% and reduction
upside case in base case
------------------------ ------------------------
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
---------------- ----------- ----------- ----------- -----------
Vehicle Finance 0.6 0.2 0.4 0.2
---------------- ----------- ----------- ----------- -----------
Retail Finance 0.7 0.3 0.5 0.2
---------------- ----------- ----------- ----------- -----------
The sensitivity is immaterial for other lending products.
The Group recognised a total impairment charge of GBP39.0
million (2021: GBP4.5 million). Were each of the scenarios to be
applied at 100%, rather than using the weightings set out above,
the increase/(decrease) in ECL provisions would be as follows:
2022 2021
-------------------------------------------------- --------------------------------------------------
Vehicle Retail Business Total Vehicle Retail Business Total
Finance Finance Finance Group Finance Finance Finance Group
Scenario GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Upside (1.9) (0.3) (0.7) (2.9) (1.2) (2.0) (2.5) (5.7)
--------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Base (1.5) 0.4 (0.4) (1.5) (0.4) (0.4) (1.9) (2.7)
--------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Downside 0.9 3.0 0.9 4.8 1.0 1.5 0.5 3.0
--------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Severe 1.6 3.8 1.7 7.1 3.3 4.6 8.4 16.3
--------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
17.1.2. ECL modelled output: Estimation of PDs
Sensitivity to reasonably possible changes in PD could
potentially result in material changes in the ECL allowance for
Vehicle Finance and Retail Finance.
A 15% change in the PD for Vehicle Finance would immediately
impact the ECL allowance by GBP3.1 million (2021: a 15% change
impacted the ECL allowance by GBP2.3 million).
A 15% change in the PD for Retail Finance would immediately
impact the ECL allowance by GBP2.5 million (2021: a 30% change
impacted the ECL allowance by GBP4.6 million).
The above sensitivities reflect the levels of defaults observed
during the year.
Due to the relatively low levels of provisions on the Business
Finance books, sensitivity to reasonably possible changes in PD are
not considered material.
17.1.3. ECL modelled output: Vehicle Finance recovery rates
With the exception of the Vehicle Finance portfolio, the
sensitivity of the ECL allowance to reasonably possible changes in
the LGD is not considered material. The Vehicle Finance portfolio
is particularly sensitive to changes in LGD due to the range of
outcomes which could crystallise depending on whether the Group is
able to recover the vehicle as security. For the Vehicle Finance
portfolio, a 20% (2021: 20%) change in the LGD is considered
reasonably possible due to delays in the vehicle collection
process. A 20% (2021: 20%) reduction in the vehicle recovery rate
assumption element of the LGD for Vehicle Finance would increase
the ECL by GBP1.9 million (2021: GBP2.0 million). There has been no
change in the vehicle recovery rate assumption in the ECL model in
either the current or prior year.
17.1.5. ECJ: Vehicle Finance used car values
Since March 2021, we have observed an increase in used car
prices of 17% (2021: 32%). This increase in used car prices has
been incorporated into the modelled LGD reducing the ECL provision
by GBP2.0 million (2021: GBP3.0 million). However, the Directors
believe that used car prices will drop by 9% (2021: drop by 19%)
and have applied an overlay for lower recoveries with an increased
provision of GBP1.0 million for the year ended 31 December 2022
(2021: GBP1.5 million).
17.1.6. Sensitivities no longer presented
At December 2022 actual observed Vehicle Finance cure rates were
used in the ECL model. As a result, at December 2022 this
sensitivity was no longer applicable. Additionally the sensitivity
of any reasonable change in the weighting of the scenarios used for
the LGD on Real Estate Finance loans in stage 3 is no longer
material.
17.1.7. Climate-risk impact
The Group has considered the impact of climate-related risks on
the financial statements, in particular the impact on impairment
within the Vehicle Finance business. While the effects of climate
change represent a source of uncertainty (in respect of potential
transitional risks such as those that may arise from changes in
future Government policy), the Group does not consider there to be
a material impact on its judgements and estimates from the
physical, transition and other climate-related risks in the
short-term.
17.2. Critical judgments
17.2.1. ECJ: Consumer Finance customer affordability
An additional PD estimate was applied at 31 December 2021 to
reflect the heightened risk of lower customer affordability in the
Consumer businesses due to the increased cost of living. A 15%
uplift was applied to the ECL on loans identified as most likely to
be impacted by increases in cost of living, which increased the ECL
by GBP4.6 million. If the uplift factor was increased to 20%, the
ECL would have been impacted by a further GBP0.9 million. At 31
December 2022, the methodology was changed to a new EMV model which
used inflation as a driver of defaults with the difference between
this model and our base models informing the expert credit
judgement.
The expert credit judgement relating to Consumer Finance
affordability reduced to GBP2.5 million at December 2022 from
GBP4.6 million at December 2021. The Directors have deemed this a
critical judgement given the uncertainty of the current economic
environment and the effect that this could have on customer
affordability. The Group is satisfied that it is reasonably
estimating the level of provisioning required to capture expected
defaults and the impacts of costs of living.
18. Derivative financial instruments
Group and Company
Interest rate derivatives are held for risk mitigation purposes.
The table below provides an analysis of the notional amount and
fair value of derivatives by hedge accounting relationship. The
amount of ineffectiveness recognised for each hedge type is shown
in Note 6. Notional amount is the amount on which payment flows are
derived and does not represent amounts at risk.
Notional Assets Liabilities Notional Assets Liabilities
2022 2022 2022 2021 2021 2021
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate derivatives designated
in fair value hedges
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
In less than one year 689.8 3.9 (6.0) 382.1 0.3 (0.7)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than one year but less
than three years 718.5 15.4 (16.1) 564.6 2.9 (3.0)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than three years but less
than five years 274.9 15.5 (3.3) 194.3 0.4 (2.2)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than five years 7.5 - - - - -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,690.7 34.8 (25.4) 1,141.0 3.6 (5.9)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate derivatives designated
in cash flow hedges
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than one year but less
than three years 14.1 - (1.1) 4.7 - (0.1)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than three years but less
than five years 2.4 0.1 - 9.4 - (0.2)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
16.5 0.1 (1.1) 14.1 - (0.3)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Foreign exchange derivatives
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
In less than one year 16.7 - (0.2) 15.3 0.2 -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,723.9 34.9 (26.7) 1,170.4 3.8 (6.2)
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
In order to manage interest rate risk arising from fixed rate
financial instruments, the Group reviews interest rate derivative
requirements on a monthly basis. The exposure from the portfolio
frequently changes due to the origination of new instruments,
contractual repayments and early prepayments made in each period.
As a result, the Group adopts a dynamic hedging strategy (sometimes
referred to as 'macro' or 'portfolio' hedge) to hedge its exposure
profile by closing and entering into new interest rate derivative
agreements on a monthly basis. The Group establishes the hedging
ratio by matching the notional of the derivatives with the
principal of the portfolio being hedged.
The following table sets out details of the hedged exposures
covered by the Group's hedging strategies:
Accumulated Accumulated
amount amount
of fair value of fair value
Carry amount adjustments Carry amount adjustments
of in the hedged of in the hedged
hedged item items hedged item items
Asset/(liability) Asset/(liability) Asset/(liability) Asset/(liability)
2022 2022 2021 2021
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------- ------------------ ------------------ ------------------ ------------------
ASSETS
-------------------------------- ------------------ ------------------ ------------------ ------------------
Interest rate fair value
hedges
-------------------------------- ------------------ ------------------ ------------------ ------------------
Loans and advances to customers
-------------------------------- ------------------ ------------------ ------------------ ------------------
Fixed rate Real Estate
Finance loans 430.7 (22.3) 354.9 (2.1)
-------------------------------- ------------------ ------------------ ------------------ ------------------
Fixed rate Vehicle Finance
loans 110.5 (4.0) 86.3 (0.4)
-------------------------------- ------------------ ------------------ ------------------ ------------------
Fixed rate Retail Finance
loans 249.2 (5.7) 160.4 (1.0)
-------------------------------- ------------------ ------------------ ------------------ ------------------
790.4 (32.0) 601.6 (3.5)
-------------------------------- ------------------ ------------------ ------------------ ------------------
Interest rate cash flow
hedges
-------------------------------- ------------------ ------------------ ------------------ ------------------
Cash and Bank of England
reserve account
-------------------------------- ------------------ ------------------ ------------------ ------------------
Bank of England reserve 16.5 N/A 14.1 N/A
-------------------------------- ------------------ ------------------ ------------------ ------------------
806.9 (32.0) 615.7 (3.5)
-------------------------------- ------------------ ------------------ ------------------ ------------------
LIABILITIES
-------------------------------- ------------------ ------------------ ------------------ ------------------
Interest rate fair value
hedges
-------------------------------- ------------------ ------------------ ------------------ ------------------
Deposits from customers
-------------------------------- ------------------ ------------------ ------------------ ------------------
Fixed rate customer deposits (900.3) 23.0 (539.5) 5.3
-------------------------------- ------------------ ------------------ ------------------ ------------------
(900.3) 23.0 (539.5) 5.3
-------------------------------- ------------------ ------------------ ------------------ ------------------
The accumulated amount of fair value hedge adjustments remaining
in the statement of financial position for hedged items that have
ceased to be adjusted for hedging gains and losses is GBP0.2
million (2021: GBPnil).
The following table shows the impact of financial assets and
financial liabilities relating to transactions where:
-- there is an enforceable master netting agreement in place but
the offset criteria are not otherwise satisfied, and
-- financial collateral is paid and received.
Gross
amount
reported Master Net amounts
on balance netting Financial after
sheet arrangements collateral offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ------------- ----------- -----------
31 December 2022
--------------------------------- ----------- ------------- ----------- -----------
Derivative financial assets
--------------------------------- ----------- ------------- ----------- -----------
Interest rate derivatives 34.9 (26.5) (7.7) 0.7
--------------------------------- ----------- ------------- ----------- -----------
34.9 (26.5) (7.7) 0.7
--------------------------------- ----------- ------------- ----------- -----------
Derivative financial liabilities
--------------------------------- ----------- ------------- ----------- -----------
Interest rate derivatives (26.5) 26.5 - -
--------------------------------- ----------- ------------- ----------- -----------
Foreign exchange derivatives (0.2) - - (0.2)
--------------------------------- ----------- ------------- ----------- -----------
(26.7) 26.5 - (0.2)
--------------------------------- ----------- ------------- ----------- -----------
Gross
amount
reported Master Net amounts
on balance netting Financial after
sheet arrangements collateral offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ------------- ----------- -----------
31 December 2021
--------------------------------- ----------- ------------- ----------- -----------
Derivative financial assets
--------------------------------- ----------- ------------- ----------- -----------
Interest rate derivatives 3.6 (3.6) - -
--------------------------------- ----------- ------------- ----------- -----------
Foreign exchange derivatives 0.2 - - 0.2
--------------------------------- ----------- ------------- ----------- -----------
3.8 (3.6) - 0.2
--------------------------------- ----------- ------------- ----------- -----------
Derivative financial liabilities
--------------------------------- ----------- ------------- ----------- -----------
Interest rate derivatives (6.2) 3.6 2.7 0.1
--------------------------------- ----------- ------------- ----------- -----------
Master netting arrangements do not meet the criteria for
offsetting in the statement of financial position. This is because
the arrangement creates an agreement for a right of set-off of
recognised amounts which is enforceable only following an event of
default, insolvency or bankruptcy of the Group or counterparties.
Furthermore, the Group and its counterparties do not intend to
settle on a net basis or realise the assets and settle the
liabilities simultaneously.
Financial collateral consists of cash settled, typically daily
or weekly, to mitigate the credit risk on the fair value of
derivatives.
19. Assets and liabilities held for sale
As at 31 December 2021, assets of GBP1.3 million relating to a
loan book and a liability of GBP2.0 million relating to collateral
held, both in STB Leasing Limited, were in the process of being
sold to its partner, RentSmart Limited. Under IFRS 5, Non-current
Assets Held for Sale and Discontinued Operations, these were
required to be reclassified as 'Held for sale' on the face of the
statement of financial position as they were expected to be sold
within 12 months of the balance sheet date. The assets and
liabilities were sold for their carrying amount on 31 January 2022.
There was no provision held against the RentSmart loans, as the
credit risk associated with those loans was retained by RentSmart
Limited.
The business is not significant enough to be classified as
discontinued operations, or to be disclosed as a separate operating
segment in Note 3.
20. Investment property
Group Company
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
1 January 2021 4.3 5.3
------------------------------------------ ----------- -----------
Revaluation 0.4 0.4
------------------------------------------ ----------- -----------
At 31 December 2021 4.7 5.7
------------------------------------------ ----------- -----------
Disposal (3.3) (3.3)
------------------------------------------ ----------- -----------
Transfer to property, plant and equipment (1.4) (1.4)
------------------------------------------ ----------- -----------
At 31 December 2022 - 1.0
------------------------------------------ ----------- -----------
As at 31 December 2021 year end the Group's investment
properties, which were let to third party occupiers, comprised:
-- Secure Trust House, Boston Drive, Bourne End, SL8 5YS; and
-- 50% of Yorke House, Arleston Way, Shirley, Solihull, B90 4LH, excluding land.
Secure Trust House was sold during the year. Additionally, the
Yorke House tenant vacated during the year, and as the Group and
Company intends to occupy the property for its own use, the 50% of
Yorke House that was included in investment properties was
transferred to property, plant and equipment.
The Company's investment properties included the two properties
above and 25 and 26 Neptune Court, Vanguard Way,
Cardiff CF24 5PJ, which is occupied by one of the Company's
subsidiaries.
The Company's investment property is stated at fair value as at
31 December 2022. The Directors have assessed the value of the
investment property at the year-end through comparison to current
rental yields on similar properties in the same area. This has
resulted in no change in values since 31 December 2021. Movements
in the fair value of investment property are recognised as
operating expenses in the income statement.
Investment property accounting policy
Investment property, which is property held to earn rentals and
for capital appreciation, is measured initially at cost, including
transaction costs. Subsequent to initial recognition, investment
property is measured at fair value. External valuations are
performed on a triennial basis. Gains or losses arising from
changes in the fair value of investment property are included in
the income statement in the period in which they arise.
An investment property is derecognised upon disposal or when the
investment property is permanently withdrawn from use and no future
economic benefits are expected from the disposal. Any gain or loss
arising on derecognition of the property (calculated as the
difference between the net disposal proceeds and the carrying
amount of the asset) is included in the income statement in the
period in which the property is derecognised.
21. Property, plant and equipment
Group
Freehold Computer
land Leasehold and other
and buildings property equipment Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------ -------------- ----------- ----------- -----------
Cost or valuation
------------------------------------ -------------- ----------- ----------- -----------
At 1 January 2021 6.6 0.1 9.1 15.8
------------------------------------ -------------- ----------- ----------- -----------
Additions - - 0.2 0.2
------------------------------------ -------------- ----------- ----------- -----------
Revaluation 0.3 - - 0.3
------------------------------------ -------------- ----------- ----------- -----------
At 31 December 2021 6.9 0.1 9.3 16.3
------------------------------------ -------------- ----------- ----------- -----------
Additions - - 1.0 1.0
------------------------------------ -------------- ----------- ----------- -----------
Disposals - (0.1) (3.4) (3.5)
------------------------------------ -------------- ----------- ----------- -----------
Transfer from investment properties 1.4 - - 1.4
------------------------------------ -------------- ----------- ----------- -----------
At 31 December 2022 8.3 - 6.9 15.2
------------------------------------ -------------- ----------- ----------- -----------
Accumulated depreciation
------------------------------------ -------------- ----------- ----------- -----------
At 1 January 2021 - - (5.9) (5.9)
------------------------------------ -------------- ----------- ----------- -----------
Depreciation charge (0.2) - (1.1) (1.3)
------------------------------------ -------------- ----------- ----------- -----------
Revaluation 0.2 - - 0.2
------------------------------------ -------------- ----------- ----------- -----------
At 31 December 2021 - - (7.0) (7.0)
------------------------------------ -------------- ----------- ----------- -----------
Depreciation charge (0.1) - (1.1) (1.2)
------------------------------------ -------------- ----------- ----------- -----------
Disposals - - 3.2 3.2
------------------------------------ -------------- ----------- ----------- -----------
Revaluation 0.1 - - 0.1
------------------------------------ -------------- ----------- ----------- -----------
At 31 December 2022 - - (4.9) (4.9)
------------------------------------ -------------- ----------- ----------- -----------
Net book amount
------------------------------------ -------------- ----------- ----------- -----------
At 31 December 2021 6.9 0.1 2.3 9.3
------------------------------------ -------------- ----------- ----------- -----------
At 31 December 2022 8.3 - 2.0 10.3
------------------------------------ -------------- ----------- ----------- -----------
The Group's freehold properties, which are occupied by the
Group, comprise:
-- the Registered Office of the Company;
-- Yorke House, Arleston Way, Shirley B90 4LH; and
-- 25 and 26 Neptune Court, Vanguard Way, Cardiff CF24 5PJ.
Company
Computer
Freehold and other
property equipment Total
GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- -----------
Cost or valuation
------------------------------------- ----------- ----------- -----------
At 1 January 2021 and 1 January 2022 2.1 6.4 8.5
------------------------------------- ----------- ----------- -----------
Additions - 0.3 0.3
------------------------------------- ----------- ----------- -----------
Disposals - (0.5) (0.5)
------------------------------------- ----------- ----------- -----------
Transfer from investment properties 1.4 - 1.4
------------------------------------- ----------- ----------- -----------
At 31 December 2022 3.5 6.2 9.7
------------------------------------- ----------- ----------- -----------
Accumulated depreciation
------------------------------------- ----------- ----------- -----------
At 1 January 2021 - (4.0) (4.0)
------------------------------------- ----------- ----------- -----------
Depreciation charge - (0.8) (0.8)
------------------------------------- ----------- ----------- -----------
At 31 December 2021 - (4.8) (4.8)
------------------------------------- ----------- ----------- -----------
Depreciation charge - (0.7) (0.7)
------------------------------------- ----------- ----------- -----------
Disposals - 0.5 0.5
------------------------------------- ----------- ----------- -----------
At 31 December 2022 - (5.0) (5.0)
------------------------------------- ----------- ----------- -----------
Net book amount
------------------------------------- ----------- ----------- -----------
At 31 December 2021 2.1 1.6 3.7
------------------------------------- ----------- ----------- -----------
At 31 December 2022 3.5 1.2 4.7
------------------------------------- ----------- ----------- -----------
The Company's freehold properties are the same as Group, but
exclude 25 and 26 Neptune Court, Vanguard Way, Cardiff CF24 5PJ,
which is not occupied by the Company.
Freehold properties are stated at fair value as at 31 December
2022. The Directors have assessed the value of the freehold
property at the year-end through comparison to current rental
yields on similar properties in the same area. This has resulted in
no change in values since 31 December 2021. An increase in the fair
value of freehold property of GBP0.5 million was recognised in
other comprehensive income at 31 December 2021 and its carrying
value was adjusted accordingly. Movements in the fair value of
freehold property are recognised in other comprehensive income, to
the extent that any reductions do not exceed the initial
increase.
The carrying value of freehold land which is included in the
total carrying value of freehold land and buildings and which is
not depreciated is GBP1.5 million (2021: GBP1.5 million) for the
Group and GBP0.8 million (2021: GBP0.8 million) for the
Company.
The historical cost of freehold property included at fair value
is as follows:
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ----------- ----------- ----------- -----------
Cost 8.6 7.1 3.0 1.6
--------------- ----------- ----------- ----------- -----------
Depreciation (2.3) (2.2) (0.1) (0.1)
--------------- ----------- ----------- ----------- -----------
Net book value 6.3 4.9 2.9 1.5
--------------- ----------- ----------- ----------- -----------
Property, plant and equipment accounting policy
Property is held at its revalued amount, being its fair value at
the date of valuation less any subsequent accumulated depreciation.
Revaluations are carried out annually at the reporting date, and
movements are recognised in Other Comprehensive Income, net of any
applicable deferred tax. External valuations are performed on a
triennial basis.
Plant and equipment is stated at historical cost less
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Pre-installed
computer software licences are capitalised as part of the computer
hardware it is installed on. Depreciation is calculated using the
straight-line method to allocate their cost to their residual
values over their estimated useful lives, which are subject to
regular review:
Land Not depreciated
Freehold buildings 50 years
Shorter of life of lease
Leasehold improvements or seven years
Computer equipment Three to five years
Other equipment Five to ten years
Gains and losses on disposals are determined by comparing
proceeds with carrying amounts. These are included in the income
statement.
The Group applies IAS 36 to determine whether property, plant
and equipment is impaired.
22. Right-of-use assets
Group Company
----------------------------------------- -----------------------------------------
Leasehold Leased Leasehold Leased
property motor vehicles Total property motor vehicles Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Cost
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 1 January 2021 4.4 0.4 4.8 3.1 0.2 3.3
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Disposals - (0.1) (0.1) - - -
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 31 December 2021 4.4 0.3 4.7 3.1 0.2 3.3
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Additions - 0.5 0.5 - 0.2 0.2
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Disposals (1.3) (0.2) (1.5) - (0.2) (0.2)
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 31 December 2022 3.1 0.6 3.7 3.1 0.2 3.3
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Accumulated depreciation
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 1 January 2021 (1.6) (0.3) (1.9) (1.1) (0.2) (1.3)
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Depreciation charge (0.6) (0.1) (0.7) (0.5) - (0.5)
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Disposals - 0.1 0.1 - - -
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 31 December 2021 (2.2) (0.3) (2.5) (1.6) (0.2) (1.8)
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Depreciation charge (0.6) (0.1) (0.7) (0.4) - (0.4)
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Disposals 0.8 0.2 1.0 - 0.2 0.2
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 31 December 2022 (2.0) (0.2) (2.2) (2.0) - (2.0)
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Net book amount
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 31 December 2021 2.2 - 2.2 1.5 - 1.5
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
At 31 December 2022 1.1 0.4 1.5 1.1 0.2 1.3
------------------------- ----------- --------------- ----------- ----------- --------------- -----------
Lessee accounting policy
The Group assesses whether a contract is or contains a lease at
inception of the contract. The Group recognises a right-of-use
asset and a corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for short-term
leases (defined as leases with a lease term of 12 months or less)
and leases of low value assets. For these leases, the Group
recognises the lease payments as an operating expense on a
straight-line basis over the term of the lease unless another
systematic basis is more representative of the time pattern in
which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value
of the future lease payments, discounted by using the rate implicit
in the lease. If this rate cannot be readily determined, the Group
uses its incremental borrowing rate. It is subsequently measured by
increasing the carrying amount to reflect interest on the lease
liability (using the effective interest rate method) and by
reducing the carrying amount to reflect the lease payments made,
and is presented as a separate line in the consolidated statement
of financial position.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before the
commencement day, less any lease incentives received and any
initial direct costs. They are subsequently measured at cost less
accumulated depreciation and impairment charges and are depreciated
over the shorter of the lease term and useful life of the
underlying asset. The depreciation starts at the commencement date
of the lease. The right-of-use assets are presented as a separate
line in the consolidated statement of financial position. The Group
applies IAS 36 to determine whether a right-of-use asset is
impaired and accounts for any identified impairment loss as
described in the 'Property, plant and equipment' policy.
Rentals made under operating leases for less than 12 months in
duration, and operating leases on low value items, are recognised
in the income statement on a straight-line basis over the term of
the lease.
23. Intangible assets
Group
Other
Computer intangible
Goodwill software assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------------- ----------- ----------- ----------- -----------
Cost or valuation
---------------------------------------------------- ----------- ----------- ----------- -----------
At 1 January 2021 1.0 16.6 2.2 19.8
---------------------------------------------------- ----------- ----------- ----------- -----------
Additions - 1.1 - 1.1
---------------------------------------------------- ----------- ----------- ----------- -----------
Transfers to cloud software development prepayments - (0.4) - (0.4)
---------------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2021 1.0 17.3 2.2 20.5
---------------------------------------------------- ----------- ----------- ----------- -----------
Additions - 1.7 - 1.7
---------------------------------------------------- ----------- ----------- ----------- -----------
Disposals - (1.8) - (1.8)
---------------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2022 1.0 17.2 2.2 20.4
---------------------------------------------------- ----------- ----------- ----------- -----------
Accumulated amortisation
---------------------------------------------------- ----------- ----------- ----------- -----------
At 1 January 2021 - (10.3) (1.8) (12.1)
---------------------------------------------------- ----------- ----------- ----------- -----------
Amortisation charge - (1.3) (0.2) (1.5)
---------------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2021 - (11.6) (2.0) (13.6)
---------------------------------------------------- ----------- ----------- ----------- -----------
Amortisation charge - (1.2) (0.2) (1.4)
---------------------------------------------------- ----------- ----------- ----------- -----------
Disposals - 1.2 - 1.2
---------------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2022 - (11.6) (2.2) (13.8)
---------------------------------------------------- ----------- ----------- ----------- -----------
Net book amount
---------------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2021 1.0 5.7 0.2 6.9
---------------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2022 1.0 5.6 - 6.6
---------------------------------------------------- ----------- ----------- ----------- -----------
Goodwill above relates to the following cash generating units,
which are part of the Retail Finance operating segment:
2022 2021
GBPmillion GBPmillion
--------------- ----------- -----------
Music business 0.3 0.3
--------------- ----------- -----------
V12 0.7 0.7
--------------- ----------- -----------
Total 1.0 1.0
--------------- ----------- -----------
The recoverable amount of these cash generating units are
determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three-year
period, and a discount rate of 8% (2021: 8%). Cash flow projections
during the forecast period are based on the expected rate of new
business. A zero growth based scenario is also considered. The
Directors believe that any reasonably possible change in the key
assumptions on which recoverable amount is based would not cause
the aggregate carrying amount to exceed the aggregate recoverable
amount of the cash generating unit.
Other intangible assets were recognised as part of the V12
Finance Group acquisition. These were recorded at fair value, and
are being amortised on a straight-line basis as follows:
Years
--------------------- -----
Distribution channel 10
--------------------- -----
Company
Computer
Goodwill software Total
GBPmillion GBPmillion GBPmillion
--------------------------------------------------- ----------- ----------- -----------
Cost or valuation
--------------------------------------------------- ----------- ----------- -----------
At 1 January 2021 0.3 12.0 12.3
--------------------------------------------------- ----------- ----------- -----------
Additions - 0.8 0.8
--------------------------------------------------- ----------- ----------- -----------
Transfer to cloud software development prepayments - (0.4) (0.4)
--------------------------------------------------- ----------- ----------- -----------
At 31 December 2021 0.3 12.4 12.7
--------------------------------------------------- ----------- ----------- -----------
Additions - 0.1 0.1
--------------------------------------------------- ----------- ----------- -----------
At 31 December 2022 0.3 12.5 12.8
--------------------------------------------------- ----------- ----------- -----------
Accumulated amortisation
--------------------------------------------------- ----------- ----------- -----------
At 1 January 2021 - (6.1) (6.1)
--------------------------------------------------- ----------- ----------- -----------
Amortisation charge - (1.2) (1.2)
--------------------------------------------------- ----------- ----------- -----------
At 31 December 2021 - (7.3) (7.3)
--------------------------------------------------- ----------- ----------- -----------
Amortisation charge - (1.1) (1.1)
--------------------------------------------------- ----------- ----------- -----------
At 31 December 2022 - (8.4) (8.4)
--------------------------------------------------- ----------- ----------- -----------
Net book amount
--------------------------------------------------- ----------- ----------- -----------
At 31 December 2021 0.3 5.1 5.4
--------------------------------------------------- ----------- ----------- -----------
At 31 December 2022 0.3 4.1 4.4
--------------------------------------------------- ----------- ----------- -----------
Goodwill above relates to the music business cash generating
unit, which is part of the Retail Finance operating segment. The
recoverable amount is determined on the same basis as for the
Group.
Intangible assets accounting policy
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition
over the fair value of the Group's share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at
cost less accumulated impairment charge and is deemed to have an
infinite life.
The Group reviews the goodwill for impairment at least annually
or when events or changes in economic circumstances indicate that
impairment may have taken place. An impairment charge is recognised
in the income statement if the carrying amount exceeds the
recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software.
Costs associated with developing or maintaining computer
software programmes are recognised as an expense as incurred unless
the technical feasibility of the development has been demonstrated,
and it is probable that the expenditure will enable the asset to
generate future economic benefits in excess of its originally
assessed standard of performance, in which case they are
capitalised.
These costs are amortised on a straight-line basis over their
expected useful lives, which are between three to ten years.
(c) Other intangibles
The acquisition of subsidiaries has been accounted for in
accordance with IFRS 3 'Business Combinations', which requires the
recognition of the identifiable assets acquired and liabilities
assumed at their acquisition date fair values. As part of this
process,
it was necessary to recognise certain intangible assets which
are separately identifiable and which are not included on the
acquiree's balance sheet, which are amortised over their expected
useful lives, as set out above.
The Group applies IAS 36 to determine whether an intangible
asset is impaired.
24. Investments in group undertakings
Company
2022 2021
Cost and net book value GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
At 1 January 4.3 4.1
--------------------------------------------------------- ----------- -----------
Addition - Investment in AppToPay Ltd 1.0 -
--------------------------------------------------------- ----------- -----------
Equity contributions to subsidiaries in respect of share
options 0.4 0.2
--------------------------------------------------------- ----------- -----------
At 31 December 5.7 4.3
--------------------------------------------------------- ----------- -----------
During the year the Group completed the acquisition of 100% of
the issued share capital of AppToPay Ltd for GBP1.0 million.
AppToPay Ltd is the owner of a proprietary technology platform, and
the acquisition is complementary to the Group's existing Retail
Finance proposition, which supports our planned entry into the
Digital Buy Now Pay Later market. In addition to this, an earn-out
of a maximum of GBP0.2 million is payable in 2023, subject to
certain performance conditions.
The Group has elected to use the optional practical expedient
within IFRS 3 Business Combinations which allows a simplified
assessment that a purchase is accounted for as an asset purchase as
opposed to a business combination if substantially all the fair
value of the gross assets acquired is concentrated in a single
identifiable asset. AppToPay Ltd's principal asset is a software
development intangible asset. The resulting impact on the Group is
an increase in intangible assets of GBP1.1 million. Since
acquisition, the assets and liabilities have been transferred
across to V12 Retail Finance Limited.
Shares in subsidiary undertakings of Secure Trust Bank PLC are
stated at cost less any provision for impairment. All subsidiary
undertakings are unlisted and none are banking institutions. All
are 100% owned by the Company. The subsidiary undertakings were all
incorporated in the UK and wholly owned via ordinary shares. All
subsidiary undertakings are included in the consolidated financial
statements and have an accounting reference date of 31
December.
Details are as follows:
Principal activity
------------------------------------ -----------------------------------
Owned directly
------------------------------------ -----------------------------------
AppToPay Ltd Non-trading
------------------------------------ -----------------------------------
Debt Managers (Services) Limited Debt management
------------------------------------ -----------------------------------
Secure Homes Services Limited Property rental
------------------------------------ -----------------------------------
STB Leasing Limited Leasing
------------------------------------ -----------------------------------
V12 Finance Group Limited Holding company
------------------------------------ -----------------------------------
Owned indirectly via an intermediate
holding company
------------------------------------ -----------------------------------
V12 Personal Finance Limited Dormant
------------------------------------ -----------------------------------
Sourcing and servicing of unsecured
V12 Retail Finance Limited loans
------------------------------------ -----------------------------------
The registered office of the Company, and all subsidiary
undertakings, is One Arleston Way, Shirley, Solihull, West
Midlands
B90 4LH.
AppToPay Ltd, Debt Managers (Services) Limited, Secure Homes
Services Limited, STB Leasing Limited, V12 Finance Group Limited
and V12 Personal Finance Limited are exempt from the requirements
of the Companies Act 2006 relating to the audit of individual
accounts by virtue of s479A, and the Company has given guarantees
accordingly under s479C in respect of the following financial
periods:
AppToPay Ltd 9 months ended 31 December 2022
----------------------------- -----------------------------------------------
Debt Managers (Services)
Limited Year ended 31 December 2022
----------------------------- -----------------------------------------------
Secure Homes Services Limited Year ended 31 December 2022
----------------------------- -----------------------------------------------
18 months ended 30 June 2022 and 6 months ended
STB Leasing Limited 31 December 2022
----------------------------- -----------------------------------------------
V12 Finance Group Limited Year ended 31 December 2022
----------------------------- -----------------------------------------------
V12 Personal Finance Limited Year ended 31 December 2022
----------------------------- -----------------------------------------------
25. Deferred taxation
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- ----------- -----------
Deferred tax assets:
------------------------------------ ----------- ----------- ----------- -----------
Other short-term timing differences 5.5 6.9 5.3 6.8
------------------------------------ ----------- ----------- ----------- -----------
At 31 December 5.5 6.9 5.3 6.8
------------------------------------ ----------- ----------- ----------- -----------
Deferred tax assets:
------------------------------------ ----------- ----------- ----------- -----------
At 1 January 6.9 6.6 6.8 7.1
------------------------------------ ----------- ----------- ----------- -----------
Income statement (1.8) 0.3 (1.8) (0.4)
------------------------------------ ----------- ----------- ----------- -----------
Other comprehensive income 0.4 - 0.3 0.1
------------------------------------ ----------- ----------- ----------- -----------
At 31 December 5.5 6.9 5.3 6.8
------------------------------------ ----------- ----------- ----------- -----------
Deferred tax accounting policy
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax assets and
liabilities, and they relate to taxes levied by the same tax
authority on the same taxable entity, or on different tax entities,
when they intend to settle current tax liabilities and assets on a
net basis or their tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
26. Other assets
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- -----------
Other receivables 1.7 0.4 1.5 0.3
-------------------------------------- ----------- ----------- ----------- -----------
Amounts due from related companies - - 3.1 89.3
-------------------------------------- ----------- ----------- ----------- -----------
Cloud software development prepayment 4.7 4.8 4.7 4.8
-------------------------------------- ----------- ----------- ----------- -----------
Other prepayments and accrued income 7.0 6.7 5.8 5.4
-------------------------------------- ----------- ----------- ----------- -----------
13.4 11.9 15.1 99.8
-------------------------------------- ----------- ----------- ----------- -----------
Cloud software development costs, principally relating to the
Group's Motor Transformation Programme, do not meet the intangible
asset recognition criteria and are therefore classified as a
prepayment, which is expensed to the income statement over the
useful economic life of the software. As a consequence of the sale
of the DMS loan book, GBP81.9 million of the amounts due from
related companies was repaid during the year.
27. Due to banks
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------------- ----------- ----------- ----------- -----------
Amounts due under the Bank of England's liquidity
support operations (Term Funding Scheme with
additional incentives for SMEs) 390.0 390.0 390.0 390.0
-------------------------------------------------- ----------- ----------- ----------- -----------
Amounts due to other credit institutions 7.7 0.7 7.7 0.7
-------------------------------------------------- ----------- ----------- ----------- -----------
Accrued interest 2.8 0.1 2.8 0.1
-------------------------------------------------- ----------- ----------- ----------- -----------
400.5 390.8 400.5 390.8
-------------------------------------------------- ----------- ----------- ----------- -----------
The accounting policy for amounts due to banks is included in
Note 1.5 Financial assets and financial liabilities
accounting policy.
28. Deposits from customers
Group and Company
2022 2021
GBPmillion GBPmillion
----------------- ----------- -----------
Access accounts 178.1 101.7
----------------- ----------- -----------
Fixed term bonds 1,414.0 974.6
----------------- ----------- -----------
Notice accounts 500.7 771.9
----------------- ----------- -----------
ISAs 421.8 255.0
----------------- ----------- -----------
2,514.6 2,103.2
----------------- ----------- -----------
The accounting policy for deposits from customers is included in
Note 1.5 Financial assets and financial liabilities accounting
policy.
29. Lease liabilities
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------- ----------- -----------
At 1 January 3.1 3.9 2.3 2.9
--------------------------------------------- ----------- ----------- ----------- -----------
New leases 0.5 - 0.2 -
--------------------------------------------- ----------- ----------- ----------- -----------
Lease termination (0.6) - - -
--------------------------------------------- ----------- ----------- ----------- -----------
Payments (1.0) (0.9) (0.7) (0.7)
--------------------------------------------- ----------- ----------- ----------- -----------
Interest expense 0.1 0.1 0.1 0.1
--------------------------------------------- ----------- ----------- ----------- -----------
At 31 December 2.1 3.1 1.9 2.3
--------------------------------------------- ----------- ----------- ----------- -----------
Lease liabilities - Gross
--------------------------------------------- ----------- ----------- ----------- -----------
- No later than one year 0.7 0.9 0.7 0.7
--------------------------------------------- ----------- ----------- ----------- -----------
- Later than one year and no later than five
years 1.5 2.3 1.3 1.7
--------------------------------------------- ----------- ----------- ----------- -----------
- More than five years - 0.1 - -
--------------------------------------------- ----------- ----------- ----------- -----------
2.2 3.3 2.0 2.4
--------------------------------------------- ----------- ----------- ----------- -----------
Less: Future finance expense (0.1) (0.2) (0.1) (0.1)
--------------------------------------------- ----------- ----------- ----------- -----------
Lease liabilities - Net 2.1 3.1 1.9 2.3
--------------------------------------------- ----------- ----------- ----------- -----------
Lease liabilities - Gross
--------------------------------------------- ----------- ----------- ----------- -----------
- No later than one year 0.7 0.8 0.7 0.7
--------------------------------------------- ----------- ----------- ----------- -----------
- Later than one year and no later than five
years 1.4 2.2 1.2 1.6
--------------------------------------------- ----------- ----------- ----------- -----------
- More than five years - 0.1 - -
--------------------------------------------- ----------- ----------- ----------- -----------
2.1 3.1 1.9 2.3
--------------------------------------------- ----------- ----------- ----------- -----------
The accounting policy for lease liabilities is included in Note
22 Lessee accounting policy.
30. Other liabilities
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
Other payables 68.1 18.3 65.0 14.9
--------------------------------- ----------- ----------- ----------- -----------
Amounts due to related companies - - 12.4 17.9
--------------------------------- ----------- ----------- ----------- -----------
Accruals and deferred income 10.0 13.0 8.5 11.0
--------------------------------- ----------- ----------- ----------- -----------
78.1 31.3 85.9 43.8
--------------------------------- ----------- ----------- ----------- -----------
31. Provisions for liabilities and charges
Group Company
--------------------------------------------- -----------------------------------------
ECL allowance ECL allowance
on on loan
loan commitments Other Total commitments Other Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
Balance at 1 January 2021 1.1 0.8 1.9 1.1 0.8 1.9
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
(Release)/charge to income
statement (0.2) 0.3 0.1 (0.2) 0.3 0.1
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
Utilised - (0.7) (0.7) - (0.7) (0.7)
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
Balance at 31 December
2021 0.9 0.4 1.3 0.9 0.4 1.3
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
Charge to income statement 0.2 1.9 2.1 0.2 1.4 1.6
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
Utilised - (0.9) (0.9) - (0.9) (0.9)
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
Balance at 31 December
2022 1.1 1.4 2.5 1.1 0.9 2.0
-------------------------- ----------------- ------------ ------------ ------------- ------------ ------------
ECL allowance on loan commitments
In accordance with the requirements of IFRS 9 the Group holds an
ECL allowance against loans it has committed to lend but have not
yet been drawn. For the Real Estate Finance and Commercial Finance
portfolios, where a loan facility is agreed that includes both
drawn and undrawn elements and the Group cannot identify the ECL on
the loan commitment separately, a combined loss allowance for both
drawn and undrawn components of the loan is presented as a
deduction from the gross carrying amount of the drawn component,
with any excess of the loss allowance over the gross drawn amount
presented as a provision. At 31 December 2022 and 31 December 2021
no provision was held for losses in excess of drawn amounts.
Other
Other includes:
-- provision for fraud, which relates to cases where the Group
has reasonable evidence of suspected fraud, but further
investigation is required before the cases can be dealt with
appropriately;
-- restructuring provision; and
-- s75 Consumer Credit Act 1974 provision.
The Directors expect all provisions to be fully utilised within
the next 1 to 2 years.
Provisions for liabilities and charges accounting policy
A provision is recognised where there is a present obligation as
a result of a past event, it is probable that the obligation will
be settled and it can be reliably estimated.
32. Subordinated liabilities
Group and Company
2022 2021
GBPmillion GBPmillion
------------------------ ----------- -----------
Notes at par value 50.0 50.0
------------------------ ----------- -----------
Unamortised issue costs (0.1) (0.3)
------------------------ ----------- -----------
Accrued interest 1.2 1.2
------------------------ ----------- -----------
51.1 50.9
------------------------ ----------- -----------
Subordinated liabilities comprises two tranches of 6.75% Fixed
Rate Reset Callable Subordinated Notes due 2028 ('the Notes')
issued in 2018. The Notes mature in 2028 but the issuer may at its
discretion redeem the Notes in 2023. The Notes are listed on the
Global Exchange Market of the Irish Stock Exchange plc trading as
Euronext Dublin.
-- The Notes are redeemable for cash at their principal amount on fixed dates.
-- The Company has a call option to redeem the securities early
in the event of a 'tax event' or a 'capital disqualification
event',
which is at the full discretion of the Company.
-- Interest payments are paid at six monthly intervals and are mandatory.
-- The Notes give the holders' rights to the principal amount on
the Notes, plus any unpaid interest, on liquidation. Any such
claims are subordinated to senior creditors, but rank pari passu
with holders of other subordinated obligations and in priority to
holders of share capital.
The above features provide the issuer with a contractual
obligation to deliver cash or another financial asset to the
holders, and therefore the Notes are classified as financial
liabilities.
Transaction costs that are directly attributable to the issue of
the Notes and are deducted from the financial liability and
expensed to the income statement on an effective interest rate
basis over the expected life of the Notes.
The Notes are treated as Tier 2 regulatory capital which is used
to support the continuing growth of the business taking into
account increases in regulatory capital buffers. The issue of the
Notes is part of an ongoing programme to diversify and expand the
capital base of the Group.
For details of post-balance sheet events relating to
subordinated liabilities, see Note 47.
The accounting policy for subordinated liabilities is included
in Note 1.5 Financial assets and financial liabilities accounting
policy.
33. Contingent liabilities and commitments
33.1 Contingent liabilities
As a financial services business, the Group must comply with
numerous laws and regulations, which significantly affect the way
it does business. Whilst the Group believes there are no material
unidentified areas of failure to comply with these laws and
regulations, there can be no guarantee that all issues have been
identified.
33.2 Capital commitments
At 31 December 2022, the Group and Company had capital
commitments of GBP1.5 million (2021: GBPnil).
33.3 Credit commitments
Group and Company
Commitments to extend credit to customers were as follows:
2022 2021
GBPmillion GBPmillion
-------------------- ----------- -----------
Consumer Finance
-------------------- ----------- -----------
Retail Finance 97.2 83.6
---------------------- ----------- -----------
Vehicle Finance 1.2 0.5
---------------------- ----------- -----------
Business Finance
-------------------- ----------- -----------
Real Estate Finance 53.1 68.9
---------------------- ----------- -----------
Commercial Finance 146.5 120.9
---------------------- ----------- -----------
298.0 273.9
-------------------- ----------- -----------
34. Share capital
Number GBPmillion
-------------------- ---------- ----------
At 1 January 2021 18,633,662 7.5
-------------------- ---------- ----------
Issued during 2021 14,143 -
-------------------- ---------- ----------
At 31 December 2021 18,647,805 7.5
-------------------- ---------- ----------
Issued during 2022 43,629 -
-------------------- ---------- ----------
At 31 December 2022 18,691,434 7.5
-------------------- ---------- ----------
Share capital comprises ordinary shares with a par value of 40
pence each.
Equity instruments accounting policy
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issuance costs. Any amounts
received over nominal value are recorded in the share premium
account, net of direct issuance costs. Costs associated with the
listing of shares are expensed immediately.
35. Other reserves
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- ----------- -----------
Cash flow hedge reserve (0.8) (0.3) (0.8) (0.3)
------------------------ ----------- ----------- ----------- -----------
Revaluation reserve 0.8 1.3 - 0.7
------------------------ ----------- ----------- ----------- -----------
Own shares (0.3) - (0.3) -
------------------------ ----------- ----------- ----------- -----------
(0.3) 1.0 (1.1) 0.4
------------------------ ----------- ----------- ----------- -----------
35.1 Own Shares
An Employee Benefit Trust ('EBT') was established during the
year. At 31 December 2022 the EBT held 37,501 shares (2021: nil)
with a nominal value of GBP15,000 (2021: GBPnil) and a market value
of GBP0.3 million (2021: GBPnil). These shares are held in trust
for the benefit of employees who will be exercising their options
under the Group's share options schemes. The trustee's expenses are
included in the operating expenses of the Group.
Own shares accounting policy
The EBT qualifies for 'look-through' accounting, under which the
EBT is treated as, in substance, an extension of the sponsoring
entity, which is Secure Trust Bank PLC. Own shares represent the
shares of the Parent Company, Secure Trust Bank PLC, that are held
by the EBT. Own shares are recorded at cost and deducted from
equity.
36. Share-based payments
At 31 December 2022 and 31 December 2021, the Group had four
share-based payment schemes in operation:
-- 2017 long term incentive plan,
-- 2017 Sharesave plan,
-- 2017 deferred bonus plan, and
-- 'Phantom' share option scheme.
A summary of the movements in share options during the year is
set out below:
Weighted Weighted
average average
exercise exercise
Forfeited Vested price price
lapsed and of options of options
Outstanding and Outstanding exercisable outstanding outstanding
at Granted cancelled Exercised at at 31 at at
1 January during during during 31 December December 31 December 31 December
2022 the year the year the year 2022 2022 Vesting 2022 2021
Number Number Number Number Number Number dates GBP GBP
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Equity
settled
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017 long
term
incentive
plan 401,800 230,789 6,242 (27,479) 611,353 11,103 2023-2025 0.40 0.40
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017
Sharesave
plan 542,446 111,833 (100,873) (7,927) 545,479 11,492 2023-2025 6.24 6.17
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017
deferred
bonus
plan 19,686 38,344 - (8,223) 49,807 - 2023-2025 0.40 0.40
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
963,932 380,966 (94,630) (43,629) 1,206,639 22,595 3.04 3.65
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Weighted
average
exercise
price 3.65 2.66 8.57 1.34 3.04
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Cash
settled
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
'Phantom'
share
option
scheme 94,167 - (16,000) - 78,167 78,167 2019 25.00 25.00
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- ----------- -----------
Expense incurred in relation to share-based
payments 1.8 0.9 1.4 0.9
-------------------------------------------- ----------- ----------- ----------- -----------
36.1. Long term incentive plan ('LTIP')
The LTIP was established on 3 May 2017. Two separate awards to a
number of participants were made under this plan during the year,
as set out below.
36.1.1 LTIP Restricted share award
54,427 (2021: 56,023) options were awarded during the year which
were not subject to any performance conditions. The awards will
vest three years from the date of grant. The original grant date
valuation was determined using a Black-Scholes model. Measurement
inputs and assumptions used for the grant date valuation were as
follows:
Awarded Awarded
during during
2022 2021
-------------------------------- -------- --------
Share price at grant date GBP12.40 GBP11.73
-------------------------------- -------- --------
Exercise price GBP0.40 GBP0.40
-------------------------------- -------- --------
Expected dividend yield 4.39% 5.49%
---------------------------------- -------- --------
Expected stock price volatility 47.27% 46.27%
---------------------------------- -------- --------
Risk free interest rate 1.47% 0.00%
---------------------------------- -------- --------
Average expected life (years) 3.00 3.00
---------------------------------- -------- --------
Original grant date valuation GBP10.49 GBP9.94
---------------------------------- -------- --------
36.1.2 LTIP
176,362 (2021: 187,527) options were awarded during the year
which are subject to four performance conditions, which are based
on:
-- rank of the total shareholder return ('TSR') over the
performance period against the TSR of the comparator group of peer
group companies;
-- rank of the TSR over the performance period against the TSR of the FTSE Small Cap Index;
-- growth of the TSR in absolute terms; and
-- maintaining appropriate risk practices over the performance
period reflecting the longer-term strategic risk management of the
Group.
36.1. Long term incentive plan ('LTIP') continued
The awards have a performance term of three years and will be
released to the participants on the vesting date. The awards will
vest on the date on which the Board determines that these
conditions have been met.
All of the share options exercised during the year were
exercised for shares. Of the share options exercised during the
prior year, 13,317 were exercised for shares, and 530 were
exercised for a cash alternative at a deemed market price of
GBP11.90.
The original grant date valuation was determined using a
Black-Scholes model for the EPS and risk management tranches, and a
Monte Carlo model for the TSR tranche. Measurement inputs and
assumptions used for the grant date valuation were as follows:
Awarded Awarded
during during
2022 2021
-------------------------------- -------- --------
Share price at grant date GBP12.40 GBP11.73
-------------------------------- -------- --------
Exercise price GBP0.40 GBP0.40
-------------------------------- -------- --------
Expected dividend yield 4.39% 5.49%
---------------------------------- -------- --------
Expected stock price volatility 46.87% 45.56%
---------------------------------- -------- --------
Risk free interest rate 1.50% 0.11%
---------------------------------- -------- --------
Average expected life (years) 3.00 3.00
---------------------------------- -------- --------
Original grant date valuation GBP7.43 GBP6.99
---------------------------------- -------- --------
36.2. Sharesave plan
The Sharesave plan was established on 3 May 2017.
This plan allows all employees to save for three years, subject
to a maximum monthly amount of GBP500, with the option to buy
shares in Secure Trust Bank PLC when the plan matures. Participants
cannot change the amount that they have agreed to save each month
but they can suspend payments for up to six months. Participants
can withdraw their savings at any time but, if they do this before
the completion date, they lose the option to buy shares at the
Option Price, and in most circumstances if participants cease to
hold plan-related employment before the third anniversary of the
grant date, then the options are also lost. The options ordinarily
vest approximately three years after grant date and are exercisable
for a period of six months following vesting.
The original grant date valuation was determined using a
Black-Scholes model. Measurement inputs and assumptions used were
as follows:
Awarded Awarded
during during
2022 2021
-------------------------------- ------- --------
Share price at grant date GBP9.62 GBP12.45
-------------------------------- ------- --------
Exercise price GBP8.10 GBP10.69
-------------------------------- ------- --------
Expected stock price volatility 48.47% 53.84%
-------------------------------- ------- --------
Expected dividend yield 4.39% 5.49%
-------------------------------- ------- --------
Risk free interest rate 3.24% 0.74%
-------------------------------- ------- --------
Average expected life (years) 3.00 3.00
-------------------------------- ------- --------
Original grant date valuation GBP3.14 GBP4.12
-------------------------------- ------- --------
36.3. Deferred bonus plan
The deferred bonus plan was established on 3 May 2017.
In 2022 and 2021, awards were granted to certain Senior Managers
of the Group. The awards vest in three equal tranches after one,
two and three years following deferral. Accordingly, the following
awards remain outstanding under the plan, entitling the members of
the scheme to purchase shares in the Company:
Awards
Awards Awards granted
granted granted Vesting
Vesting Vesting after
after after three Awards
one year two years years granted
Number Number Number Total
----------------------- --------- ---------- -------- --------
At 1 January 2021 11,679 18,068 21,572 51,319
----------------------- --------- ---------- -------- --------
Granted 4,057 4,340 4,626 13,023
----------------------- --------- ---------- -------- --------
Exercised (826) - - (826)
----------------------- --------- ---------- -------- --------
Cancelled (9,183) (15,572) (19,075) (43,830)
----------------------- --------- ---------- -------- --------
At 31 December 2021 5,727 6,836 7,123 19,686
----------------------- --------- ---------- -------- --------
Granted 12,779 12,779 12,786 38,344
----------------------- --------- ---------- -------- --------
Exercised (5,727) (2,496) - (8,223)
----------------------- --------- ---------- -------- --------
At 31 December 2022 12,779 17,119 19,909 49,807
----------------------- --------- ---------- -------- --------
Vested and exercisable - - - -
----------------------- --------- ---------- -------- --------
38,344 awards were made under this plan in April 2022, (1,702 in
April 2021 and 11,321 in September 2021). The original grant date
valuation was determined using a Black-Scholes model. Measurement
inputs and assumptions used were as follows:
Granted
Granted Granted in 2022
in 2022 in 2022 Awards
Awards Awards vesting
vesting vesting after
after after three
one year two years years
-------------------------------- --------- ---------- --------
Share price at grant date GBP12.40 GBP12.40 GBP12.40
-------------------------------- --------- ---------- --------
Exercise price GBP0.40 GBP0.40 GBP0.40
-------------------------------- --------- ---------- --------
Expected dividend yield 4.39% 4.39% 4.39%
-------------------------------- --------- ---------- --------
Expected stock price volatility 32.04% 42.03% 47.27%
-------------------------------- --------- ---------- --------
Risk free interest rate 1.39% 1.46% 1.47%
-------------------------------- --------- ---------- --------
Average expected life (years) 1.00 2.00 3.00
-------------------------------- --------- ---------- --------
Original grant date valuation GBP11.47 GBP10.97 GBP10.49
-------------------------------- --------- ---------- --------
Granted Granted Granted Granted
in in in April Granted Granted in September
April April 2021 in September in September 2021
2021 2021 Awards 2021 2021 Awards
Awards Awards vesting Awards Awards vesting
vesting vesting after vesting vesting after
after after three after after three
one year two years years one years two years years
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Share price at grant date GBP11.73 GBP11.73 GBP11.73 GBP12.45 GBP12.45 GBP12.45
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Exercise price GBP0.40 GBP0.40 GBP0.40 GBP0.40 GBP0.40 GBP0.40
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Expected dividend yield 5.49% 5.49% 5.49% 5.49% 5.49% 5.49%
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Expected stock price volatility 46.54% 53.22% 46.27% 42.06% 60.86% 53.84%
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Risk free interest rate 0.00% 0.00% 0.00% 0.74% 0.74% 0.74%
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Average expected life (years) 1.00 2.00 3.00 0.58 1.58 2.58
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
Original grant date valuation GBP10.85 GBP10.39 GBP9.94 GBP11.54 GBP11.06 GBP10.59
-------------------------------- --------- ---------- --------- ------------- ------------- -------------
36.4 Cash settled share-based payments
On 16 March 2015, a four-year 'phantom' share option scheme was
established in order to provide effective long-term incentive
to senior management of the Group. Under the scheme, no actual
shares would be issued by the Company, but those granted awards
under the scheme would be entitled to a cash payment. The amount of
the award is calculated by reference to the increase in the value
of an ordinary share in the Company over an initial value set at
GBP25 per ordinary share, being the price at which the shares
resulting from the exercise of the first tranche of share options
under the share option scheme were sold in November 2014. The
options vested during 2019 and are exercisable for a period of 10
years after grant date.
As at 31 December 2022, the estimated fair value has been
prepared using the Black-Scholes model. Measurement inputs and
assumptions used were as follows:
2022 2021
-------------------------------- ------- --------
Share price at reporting date GBP7.50 GBP12.35
-------------------------------- ------- --------
Expected stock price volatility 38.68% 45.30%
-------------------------------- ------- --------
Expected dividend yield 4.39% 5.49%
-------------------------------- ------- --------
Risk free interest rate 3.39% 0.55%
-------------------------------- ------- --------
Average expected life (years) 2.21 3.34
-------------------------------- ------- --------
Fair value GBP0.04 GBP1.06
-------------------------------- ------- --------
This resulted in the following being recognised in the financial
statements:
2022 2021
GBPmillion GBPmillion
---------- ----------- -----------
Liability - 0.1
---------- ----------- -----------
For each award granted during the year, expected volatility was
determined by calculating the historical volatility of the Group's
share price over the period equivalent to the expected term of the
options being granted. The expected life used in the model has been
adjusted, based on management's best estimate, for the effects of
non-transferability, exercise restrictions, and behavioural
considerations.
Share-based compensation accounting policy
The fair value of equity settled share-based payment awards are
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). The amount is recognised in operating expenses in
the income statement, with a corresponding increase in equity.
Further details of the valuation methodology are set out above.
The fair value of cash settled share-based payments is
recognised in operating expenses in the income statement with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at the
settlement date based on the fair value of the options granted,
with a corresponding adjustment to operating expenses.
37. Cash flow statement
37.1. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise the following balances with less than three
months' maturity from the date of acquisition.
Restated Restated
Group Group Company Company
2022 2021 2022 2021
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- ----------- -----------
Cash and Bank of England reserve account 370.1 235.7 370.1 235.7
----------------------------------------- ----------- ----------- ----------- -----------
Loans and advances to banks (Note 13) 50.5 50.3 48.9 47.4
----------------------------------------- ----------- ----------- ----------- -----------
Debt securities - 25.0 - 25.0
----------------------------------------- ----------- ----------- ----------- -----------
Less:
----------------------------------------- ----------- ----------- ----------- -----------
Cash ratio deposit (3.7) (1.7) (3.7) (1.7)
----------------------------------------- ----------- ----------- ----------- -----------
Collateral margin account - (2.6) - (2.6)
----------------------------------------- ----------- ----------- ----------- -----------
(3.7) (4.3) (3.7) (4.3)
----------------------------------------- ----------- ----------- ----------- -----------
Cash and cash equivalents 416.9 306.7 415.3 303.8
----------------------------------------- ----------- ----------- ----------- -----------
Cash and cash equivalents in the prior year has been restated
from GBP303.0 million in the Group and GBP300.1 million in the
Company. See Note 1.3 for further details.
The Group and Company has no access to the cash ratio deposit or
the collateral margin accounts, so these amounts do not meet the
definition of cash and cash equivalents and accordingly they are
excluded from cash and cash equivalents.
37.2. Changes in liabilities arising from financing
activities
All changes in liabilities arising from financing activities
arise from changes in cash flows, apart from GBP0.1 million (2021:
GBP0.1 million) of lease liabilities interest expense, as shown in
Note 29, and GBP0.2 million (2021: GBP0.1 million) amortisation of
issue costs
on subordinated liabilities, as shown in Note 32.
Cash and cash equivalents accounting policy
For the purpose of the statement of cash flows, cash and cash
equivalents comprise cash in hand and demand deposits, and cash
equivalents, being highly liquid investments which are convertible
into cash with an insignificant risk of changes in value with a
maturity of three months or less at the date of acquisition,
including certain loans and advances to banks and short-term highly
liquid debt securities.
38. Financial risk management strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The Directors and senior
management of the Group have formally adopted a Group risk appetite
statement which sets out the Board's attitude to risk and internal
controls. Key risks identified by the Directors are formally
reviewed and assessed at least once a year by the Board. In
addition key business risks are identified, evaluated and managed
by operating management on an ongoing basis by means of procedures
such as physical controls, credit and other authorisation limits
and segregation of duties. The Board also receives regular reports
on any risk matters that need to be brought to its attention.
Significant risks identified in connection with the development of
new activities are subject to consideration by the Board. There are
budgeting procedures in place and reports are presented regularly
to the Board detailing the results of each principal business unit,
variances against budget and prior year, and other performance
data.
A more detailed description of the risk governance structure is
contained in the Principal risks and uncertainties section
beginning on page 25 of the 2022 Annual Report and Accounts.
Included within the principal financial risks inherent in the
Group's business are credit risk (Note 39), market risk (Note 40),
liquidity risk (Note 41), and capital risk (Note 42).
39. Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to satisfy their debt
servicing commitments when due. Counterparties include the
consumers to whom the Group lends on a secured and unsecured basis
and small and medium size enterprises ('SME') to whom the Group
primarily lends on a secured basis as well as the market
counterparties with whom the Group deals.
Impairment provisions are provided for expected credit losses at
the statement of financial position date. Significant changes in
the economy could result in losses that are different from those
provided for at the statement of financial position date.
Management therefore carefully manages the Group's exposures to
credit risk as it considers this to be the most significant risk to
the business. Disclosures relating to collateral on loans and
advances to customers are disclosed in Note 15.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. Disclosures of these at
the year-end are contained in Note 13. There is no direct exposure
to the Eurozone and peripheral Eurozone countries.
See page 27 of the 2022 Annual Report and Accounts for further
details on the mitigation and change during the year of credit
risk.
Group and Company
With the exception of loans and advances to customers, the
carrying amount of financial assets represents the maximum exposure
to credit risk. The maximum exposure to credit risk for loans and
advances to customers by portfolio and IFRS 9 stage without taking
account of any collateral held or other credit enhancements
attached was as follows:
Stage 1 Stage 2 Stage 3
---------- ---------------------------------- ---------------------------------------- ----------
Total
gross
loans
<= 30 Purchased and
days > 30 days Excl. credit advances
past past purchased -- to
due due Total credit-impaired impaired Total customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
31 December
2022
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Retail
Finance 987.4 85.4 3.8 89.2 6.1 - 6.1 1,082.7
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Vehicle
Finance 306.8 83.3 3.8 87.1 23.6 - 23.6 417.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Real Estate
Finance 957.9 122.9 21.3 144.2 16.8 - 16.8 1,118.9
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Commercial
Finance 327.7 50.2 - 50.2 0.5 - 0.5 378.4
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total drawn
exposure 2,579.8 341.8 28.9 370.7 47.0 - 47.0 2,997.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Loan
commitments 298.0 - - - - - - 298.0
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total gross
exposure 2,877.8 341.8 28.9 370.7 47.0 - 47.0 3,295.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Impairment
allowance (24.3) (23.9) (4.7) (28.6) (25.1) - (25.1) (78.0)
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Provision
for
loan
commitments (1.1) - - - - - - (1.1)
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total net
exposure 2,852.4 317.9 24.2 342.1 21.9 - 21.9 3,216.4
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
GBP16.1 million (2021: GBP50.3 million) of collateral in the
form of property has been pledged as security for Real Estate
Finance Stage 3 balances of GBP14.8 million (2021: GBP37.3
million). GBP11.2 million (2021: GBP8.9 million) of collateral in
the form of vehicles has been pledged as security for Vehicle
Finance Stage 3 balances of GBP6.6 million (2021: GBP5.0
million).
Group
Stage
1 Stage 2 Stage 3
---------- ---------------------------------- ---------------------------------------- ----------
Total
gross
loans
<= 30 Purchased and
days > 30 days Excl. credit advances
past past purchased -- to
due due Total credit-impaired impaired Total customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
31 December
2021
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Retail
Finance 659.4 120.1 2.6 122.7 4.4 - 4.4 786.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Vehicle
Finance 207.0 68.9 2.2 71.1 19.4 - 19.4 297.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Debt
Management - - - - 10.8 76.1 86.9 86.9
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Real Estate
Finance 911.4 161.4 - 161.4 40.0 - 40.0 1,112.8
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Commercial
Finance 291.7 17.5 - 17.5 5.2 - 5.2 314.4
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total drawn
exposure 2,069.5 367.9 4.8 372.7 79.8 76.1 155.9 2,598.1
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Loan
commitments 271.0 2.9 - 2.9 - - - 273.9
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total gross
exposure 2,340.5 370.8 4.8 375.6 79.8 76.1 155.9 2,872.0
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Impairment
allowance (18.5) (16.6) (3.4) (20.0) (23.1) (5.9) (29.0) (67.5)
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Provision
for
loan
commitments (0.9) - - - - - - (0.9)
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total net
exposure 2,321.1 354.2 1.4 355.6 56.7 70.2 126.9 2,803.6
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
A reconciliation of opening to closing allowance for impairment
of loans and advances to customers is presented in Note 17.
Company
Stage
1 Stage 2 Stage 3
---------- ---------------------------------- ---------------------------------------- ----------
Total
gross
loans
<= 30 Purchased and
days > 30 days Excl. credit advances
past past purchased -- to
due due Total credit-impaired impaired Total customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
31 December
2021
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Retail
Finance 659.4 120.1 2.6 122.7 4.4 - 4.4 786.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Vehicle
Finance 207.0 68.9 2.2 71.1 19.4 - 19.4 297.5
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Real Estate
Finance 911.4 161.4 - 161.4 40.0 - 40.0 1,112.8
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Commercial
Finance 291.7 17.5 - 17.5 5.2 - 5.2 314.4
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total drawn
exposure 2,069.5 367.9 4.8 372.7 69.0 - 69.0 2,511.2
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Loan
commitments 271.0 2.9 - 2.9 - - - 273.9
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total gross
exposure 2,340.5 370.8 4.8 375.6 69.0 - 69.0 2,785.1
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Impairment
allowance (18.6) (16.7) (3.6) (20.3) (22.0) - (22.0) (60.9)
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Provision
for
loan
commitments (0.9) - - - - - - (0.9)
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
Total net
exposure 2,321.0 354.1 1.2 355.3 47.0 - 47.0 2,723.3
------------ ---------- ---------- ---------- ---------- --------------- ---------- ----------- ----------
39.1. Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
nature of the Group's lending operations, the Directors consider
the lending operations of the Group as a whole to be well
diversified. Details of the Group's loans and advances to customers
and loan commitments by product is provided in Notes 3 and 33
respectively.
Geographical concentration
The Group's Real Estate Finance loan book is secured against UK
property only. The geographical concentration of these business
loans and advances to customers, by location of the security is as
follows:
Group and Company
GBPmillion GBPmillion
2022 2021
------------------------------------------ ---------- ----------
Central England 101.9 90.1
-------------------------------------------- ---------- ----------
Greater London 689.7 619.7
-------------------------------------------- ---------- ----------
Northern England 68.7 66.2
-------------------------------------------- ---------- ----------
South East England (excl. Greater London) 189.5 258.7
-------------------------------------------- ---------- ----------
South West England 20.4 30.7
-------------------------------------------- ---------- ----------
Scotland, Wales and Northern Ireland 48.7 47.4
-------------------------------------------- ---------- ----------
Gross loans and receivables 1,118.9 1,112.8
-------------------------------------------- ---------- ----------
Allowance for impairment (3.4) (3.2)
-------------------------------------------- ---------- ----------
Total 1,115.5 1,109.6
-------------------------------------------- ---------- ----------
39.2. Forbearance
Consumer Finance
Throughout the year Group did not routinely reschedule
contractual arrangements where customers default on their
repayments.
In cases where it offered the customer the option to reduce or
defer payments for a short period, the loans retained the normal
contractual payment due dates and were treated the same as any
other defaulting cases for impairment purposes. Arrears tracking
would continue on the account with any impairment charge being
based on the original contractual due dates for all products.
All forbearance arrangements are formally discussed and agreed
with the customer. By offering customers in financial
difficulty
the option of forbearance the Group potentially exposes itself
to an increased level of risk through prolonging the period of
non-contractual payment and/or potentially placing the customer
into a detrimental position at the end of the forbearance
period.
All forbearance arrangements are reviewed and monitored
regularly to assess the ongoing potential risk, suitability and
sustainability to the Group. As at the year end, the Consumer
Finance business approximately had the following cases (by volume)
in forbearance:
-- Retail Finance 0.15% (2021: 0.12%); and
-- Vehicle Finance: 0.16% (2021: 0.12%).
In respect of Vehicle Finance, where forbearance measures are
not possible or are considered not to be in the customer's best
interests, or where such measures have been tried and the customer
has not adhered to the forbearance terms that have been agreed, the
Group will consider realising its security and taking possession of
the vehicle in order to sell it and clear the outstanding debt.
Where the sale of the vehicle does not cover all of the remaining
loan, normal credit collection procedures may be carried out in
order to recover the outstanding debt, or the debt may be sold to a
third party debt recovery agent or in certain circumstances the
debt may be written off.
Real Estate Finance
Where clients provided evidence of payment difficulties, they
were supported by being granted one or both of extensions to loan
maturity dates and partial or full short-term payment holidays. A
small number of clients who experienced difficulties in meeting
their financial commitments were offered concessions (facility
restructures) which Real Estate Finance would not have provided
under normal circumstances. As at 31 December 2022, 1.3% of
accounts were classed as forborne (2021: 1.4%). Where forbearance
measures are not possible or are considered not to be in the
client's best interests, or where such measures
have been tried and the customer has not adhered to the
forbearance terms that have been agreed, the Group will consider
realising its security.
40. Market risk
The Group's, market risk is primarily linked to interest rate
risk. Interest rate risk refers to the exposure of the Group's
financial position to adverse movements in interest rates.
When interest rates change, the present value and timing of
future cash flows change. This in turn changes the underlying value
of the Group's assets, liabilities and off-balance sheet
instruments and hence its economic value. Changes in interest rates
also affect the Group's earnings by altering interest-sensitive
income and expenses, affecting its net interest income.
The principal currency in which the Group operates is Sterling,
although a small number of transactions are completed in US
dollars, Euros and other currencies in the Commercial Finance
business. The Group has no significant exposures to foreign
currencies and hedges any residual currency risks to Sterling. The
Group does not operate a trading book.
See page 30 of the 2022 Annual Report and Accounts for further
details on the mitigation and change during the year of market
risk.
Interest rate risk
Group and Company
The Group seeks to 'match' interest rate risk on either side of
the statement of financial position and hedges residual mismatch in
accordance with risk appetites. However, this is not a perfect
match and interest rate risk is present on the mismatch between
fixed rate loans and savings products and variable rate assets and
liabilities.
The Group monitors the interest rate mismatch on at least a
monthly basis using market value sensitivity and earnings at risk,
which were as follows at 31 December:
2022 2021
GBPmillion GBPmillion
------------------------------------- ----------- -----------
Market value sensitivity
------------------------------------- ----------- -----------
+200bp parallel shift in yield curve 1.8 2.7
------------------------------------- ----------- -----------
-200bp parallel shift in yield curve (1.9) (2.7)
------------------------------------- ----------- -----------
Earnings at risk sensitivity
------------------------------------- ----------- -----------
+100bp parallel shift in yield curve 1.2 1.4
------------------------------------- ----------- -----------
-100bp parallel shift in yield curve (1.2) (0.4)
------------------------------------- ----------- -----------
The Directors consider that 200bps in the case of Market value
sensitivity and 100bps in the case of Earnings at risk are a
reasonable approximation of possible changes.
41. Liquidity and funding risk
Liquidity and funding risk is the risk that the Group is unable
to meet its obligations as they fall due or can only do so at
excessive cost. The Group maintains adequate liquidity resources
and a prudent, stable funding profile at all times to cover
liabilities as they fall due in normal and stressed conditions.
The Group manages its liquidity in line with internal and
regulatory requirements, and at least annually assesses the
robustness of the liquidity requirements as part of the Group's
Internal Liquidity Adequacy Assessment Process ('ILAAP').
See page 28 of the 2022 Annual Report and Accounts for further
details on the mitigation and change during the year of liquidity
and funding risk.
The tables below analyse the contractual undiscounted cash flows
for financial liabilities into relevant maturity groupings:
More than
three More than
Not more months one year
Gross than but less but less More than
Carrying nominal three than one than five five
amount outflow months year years years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2022
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Due to banks 400.5 438.7 10.6 10.2 417.9 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Deposits from customers 2,514.6 2,565.0 956.7 1,030.0 577.2 1.1
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Subordinated liabilities 51.1 53.4 0.8 52.6 - -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Lease liabilities 2.1 2.2 0.2 0.5 1.5 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other financial liabilities 68.1 68.1 68.1 - - -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
3,036.4 3,127.4 1,036.4 1,093.3 996.6 1.1
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Derivative financial liabilities 26.7 27.5 4.4 12.2 10.9 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
3,063.1 3,154.9 1,040.8 1,105.5 1,007.5 1.1
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than
three More than
Not more months one year
Gross than but less but less More than
Carrying nominal three than one than five five
amount outflow months year years years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2021
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Due to banks 390.8 394.1 0.1 1.0 393.0 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Deposits from customers 2,103.2 2,131.9 752.6 807.4 566.1 5.8
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Subordinated liabilities 50.9 56.8 0.8 2.5 53.5 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liabilities associated with
assets held for sale 2.0 2.0 2.0 - - -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Lease liabilities 3.1 3.3 0.9 2.3 0.1 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other financial liabilities 18.3 18.3 18.3 - - -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
2,568.3 2,606.4 774.7 813.2 1,012.7 5.8
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Derivative financial liabilities 6.2 5.5 0.1 1.5 3.9 -
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
2,574.5 2,611.9 774.8 814.7 1,016.6 5.8
--------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
The contractual undiscounted cash flows for financial
liabilities of the Company are the same as above except for the
following:
More than
three More than
Not more months one year
Gross than but less but less More than
Carrying nominal three than one than five five
amount outflow months year years years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2022
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Lease liabilities 1.9 2.0 0.2 0.5 1.3 -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other financial liabilities 77.4 77.4 77.4 - - -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial liabilities 3,045.5 3,136.5 1,045.7 1,093.3 996.4 1.1
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total 3,072.2 3,164.0 1,050.1 1,105.5 1,007.3 1.1
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than
three More than
Not more months one year
Gross than but less but less More than
Carrying nominal three than one than five five
amount outflow months year years years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2021
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Lease liabilities 2.3 2.4 0.7 1.7 - -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other financial liabilities 32.8 32.8 32.8 - - -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial liabilities 2,580.0 2,618.0 787.0 812.6 1,012.6 5.8
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total 2,586.2 2,623.5 787.1 814.1 1,016.5 5.8
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
42. Capital risk
Capital risk is the risk that the Group will have insufficient
capital resources to meet minimum regulatory requirements and to
support the business. The Group adopts a conservative approach to
managing its capital and at least annually assesses the robustness
of the capital requirements as part of the Group's Internal Capital
Adequacy Assessment Process ('ICAAP').
The Group has Tier 1 and Tier 2 capital resources, noting the
regulatory adjustments required in the table below.
Further information on capital is included within our Pillar 3
disclosures, which can be found on the Group's website.
See page 29 of the 2022 Annual Report and Accounts for further
details on the mitigation and change during the year of capital
risk.
The following table, which is unaudited and therefore not in
scope of the Independent Auditor's Report, shows the regulatory
capital resources for the Group. The Group has adopted the IFRS
9 transitional rules. For further detail see page 16 of the
Financial review in the 2022 Annual Report and Accounts.
Tier 2 capital comprises solely subordinated debt, excluding
accrued interest, capped at 25% of the Pillar 1 and 2A requirements
as set by the PRA.
2022 2021
GBPmillion GBPmillion
(unaudited) (unaudited)
--------------------------------------------------------- ------------ ------------
CET 1
--------------------------------------------------------- ------------ ------------
Share capital 7.5 7.5
--------------------------------------------------------- ------------ ------------
Share premium 82.2 82.2
--------------------------------------------------------- ------------ ------------
Retained earnings 237.5 211.7
--------------------------------------------------------- ------------ ------------
Revaluation reserve 0.8 1.3
--------------------------------------------------------- ------------ ------------
Own shares (0.3) -
--------------------------------------------------------- ------------ ------------
IFRS 9 transition adjustments 11.7 13.9
--------------------------------------------------------- ------------ ------------
Goodwill (1.0) (1.0)
--------------------------------------------------------- ------------ ------------
Intangible assets net of attributable deferred tax (5.6) (4.3)
--------------------------------------------------------- ------------ ------------
CET1 capital before foreseeable dividend 332.8 311.3
--------------------------------------------------------- ------------ ------------
Foreseeable dividend (5.4) (7.7)
--------------------------------------------------------- ------------ ------------
CET1 and Tier 1 capital 327.4 303.6
--------------------------------------------------------- ------------ ------------
Tier 2
--------------------------------------------------------- ------------ ------------
Subordinated liabilities 49.9 50.9
--------------------------------------------------------- ------------ ------------
Less ineligible portion - (3.9)
--------------------------------------------------------- ------------ ------------
Total Tier 2 capital 49.9 47.0
--------------------------------------------------------- ------------ ------------
Own funds 377.3 350.6
--------------------------------------------------------- ------------ ------------
Reconciliation to total equity:
--------------------------------------------------------- ------------ ------------
IFRS 9 transition adjustments (11.7) (13.9)
--------------------------------------------------------- ------------ ------------
Eligible subordinated liabilities (49.9) (47.0)
--------------------------------------------------------- ------------ ------------
Cash flow hedge reserve (0.8) (0.3)
--------------------------------------------------------- ------------ ------------
Goodwill and other intangible assets net of attributable
deferred tax 6.6 5.3
--------------------------------------------------------- ------------ ------------
Foreseeable dividend 5.4 7.7
--------------------------------------------------------- ------------ ------------
Total equity 326.9 302.4
--------------------------------------------------------- ------------ ------------
The Group is subject to capital requirements imposed by the PRA
on all financial services firms. During the year, the Group
complied with these requirements.
43. Classification of financial assets and liabilities
Group
Total Total
carrying Fair value carrying Fair value
amount Fair value hierarchy amount Fair value hierarchy
GBPmillion GBPmillion level GBPmillion GBPmillion level
2022 2022 2022 2021 2021 2021
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Cash and Bank of England reserve Level Level
account 370.1 370.1 1 234.0 234.0 1
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Loans and advances to banks 50.5 50.5 2 52.0 52.0 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level
Debt securities - - 25.0 25.0 1
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Loans and advances to customers 2,919.5 2,895.6 3 2,530.6 2,568.6 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Derivative financial instruments 34.9 34.9 2 3.8 3.8 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level
Assets held for sale - - 1.3 1.3 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Other financial assets 1.7 1.7 3 0.4 0.4 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
3,376.7 3,352.8 2,847.1 2,885.1
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Due to banks 400.5 400.5 2 390.8 390.8 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Deposits from customers 2,514.6 2,494.0 3 2,103.2 2,106.9 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Derivative financial instruments 26.7 26.7 2 6.2 6.2 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level
Liabilities held for sale - - 2.0 2.0 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Lease liabilities 2.1 2.1 3 3.1 3.1 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Other financial liabilities 68.1 68.1 3 18.3 18.3 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Subordinated liabilities 51.1 43.5 2 50.9 50.7 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
3,063.1 3,034.9 2,574.5 2,578.0
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
All financial assets and liabilities at 31 December 2022 and 31
December 2021 were carried at amortised cost, except for derivative
financial instruments which are at fair value through profit and
loss. Therefore, for these assets and liabilities, the fair value
hierarchy noted above relates to the disclosure in this note
only.
Company
Total Total
carrying Fair value carrying Fair value
amount Fair value hierarchy amount Fair value hierarchy
GBPmillion GBPmillion level GBPmillion GBPmillion level
2022 2022 2022 2021 2021 2021
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
At 31 December 2022
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Cash and Bank of England reserve Level Level
account 370.1 370.1 1 234.0 234.0 1
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Loans and advances to banks 48.9 48.9 2 49.1 49.1 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level
Debt securities - - 25.0 25.0 1
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Loans and advances to customers 2,919.5 2,895.6 3 2,450.3 2,487.1 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Derivative financial instruments 34.9 34.9 2 3.8 3.8 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Other financial assets 4.6 4.6 3 89.6 89.6 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
3,378.0 3,354.1 2,851.8 2,888.6
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Due to banks 400.5 400.5 2 390.8 390.8 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Deposits from customers 2,514.6 2,494.0 3 2,103.2 2,106.9 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Derivative financial instruments 26.7 26.7 2 6.2 6.2 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Liabilities associated with Level
assets held for sale - - 2.0 2.0 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Lease liabilities 1.9 1.9 3 2.3 2.3 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Other financial liabilities 77.4 77.4 3 32.8 32.8 3
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
Level Level
Subordinated liabilities 51.1 43.5 2 50.9 50.7 2
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
3,072.2 3,044.0 2,588.2 2,591.7
--------------------------------- ----------- ----------- ---------- ----------- ----------- ----------
All financial assets and liabilities at 31 December 2022 and 31
December 2021 were carried at amortised cost except for derivative
financial instruments which are valued at fair value through profit
and loss. Therefore, for these assets, the fair value hierarchy
noted above relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value
hierarchies of the Group and Company's financial assets and
liabilities.
The Group measures fair value using the following fair value
hierarchy that reflects the significance of the inputs used in
making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly
(i.e. as prices) or indirectly (i.e. derived from prices).
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Loans and advances to customers and Deposits from customers
The fair value of the financial assets and liabilities is
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was a market rate of interest at the balance sheet date.
For loans and advances to customers, the same assumptions regarding
the risk of default were applied as those used to derive the
carrying value.
Debt securities
The fair value of debt securities is based on the quoted price
where available.
Derivative financial instruments
The fair value of derivative financial instruments is calculated
based on the present value of the expected future cash flows of the
instruments. The rate used to discount the cash flows was the SONIA
forward curve at the balance sheet date.
Subordinated liabilities
The fair value subordinated liabilities are calculated based on
quoted market prices where available, or where an active market
quote is not available, a proxy is used from similar issuances.
For all remaining financial assets and liabilities, the fair
value of financial assets and liabilities is calculated to be
equivalent to their carrying value, due to their short maturity
dates.
44. Related party transactions
Related parties of the Company and Group include subsidiaries,
key management personnel, close family members of key management
personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
No transactions were entered into with Key Management Personnel
or their close family members during the current or prior year.
The Company undertook the following transactions with other
companies in the Secure Trust Bank Group:
2022 2021
GBPmillion GBPmillion
------------------------------------------------------------- ----------- -----------
Interest income and similar income (26.2) (21.0)
------------------------------------------------------------- ----------- -----------
Gain on sale of defaulted debt 0.2 0.1
------------------------------------------------------------- ----------- -----------
Operating expenses (0.4) (0.7)
------------------------------------------------------------- ----------- -----------
Waiver of intercompany balance (0.2) -
------------------------------------------------------------- ----------- -----------
Investment income 14.0 4.8
------------------------------------------------------------- ----------- -----------
(12.6) (16.8)
------------------------------------------------------------- ----------- -----------
Equity contribution to subsidiaries re. share-based payments 0.4 0.2
------------------------------------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable
to, related companies are noted below:
Company Company
2022 2021
GBPmillion GBPmillion
------------------------------------------------ ----------- -----------
Amounts receivable from subsidiary undertakings 3.1 89.3
------------------------------------------------ ----------- -----------
Amounts due to subsidiary undertakings (12.4) (17.9)
------------------------------------------------ ----------- -----------
(9.3) 71.4
------------------------------------------------ ----------- -----------
All amounts above are repayable on demand and the Company
charged interest at a variable rate on amounts outstanding.
Directors' remuneration
The Directors' emoluments (including pension contributions and
benefits in kind) for the year are disclosed in the Directors'
Remuneration Report beginning on page 80 of the 2022 Annual Report
and Accounts.
At the year-end the ordinary shares held by the Directors are
disclosed in the Directors' Remuneration Report beginning on page
80 of the 2022 Annual Report and Accounts. Details of the
Directors' holdings of share options, as well as details of those
share options exercised during the year, are also disclosed in the
Directors' Report.
45. Immediate parent company and ultimate controlling party
The Company has had no immediate parent company or ultimate
controlling party.
46. Country-by-Country reporting
The Capital Requirements (Country-by-Country Reporting)
Regulations 2013 introduced reporting obligations for institutions
within the scope of CRD V. The requirements aim to give increased
transparency regarding the activities of institutions. The
Country-by-Country Information is set out below:
Average Profit
number before Tax paid
Nature Turnover of FTE tax on profit
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------ ------------------ ------------- --------- ----------- ---------- ----------- -----------
31 December Secure Trust Bank Banking
2022 PLC services UK 208.3 940 44.0 7.0
------------ ------------------ ------------- --------- ----------- ---------- ----------- -----------
31 December Secure Trust Bank Banking
2021 PLC services UK 194.3 973 56.0 12.6
------------ ------------------ ------------- --------- ----------- ---------- ----------- -----------
47. Non-adjusting post balance sheet events
47.1 Subordinated liabilities
On 28 February 2023, the Group and Company issued GBP90.0
million 13.0% Fixed Rate Reset Callable Subordinated Notes due
August 2033 (the 'New Notes'). The New Notes are treated as Tier 2
regulatory capital and are listed on the International Securities
Market of the London Stock Exchange. This issuance is in line with
the Group's funding strategy and supports the Group's stated
medium-term growth ambitions.
The Group and Company redeemed all of its existing 6.75%. Fixed
Rate Reset Callable Subordinated Notes due in 2028 in two tranches:
GBP25.0 million on 28 February 2023; and GBP25.0 million on 20
March 2023.
47.2 Loans and advances to customers
Post year end, a dispute has arisen between a Business Finance
client of the Group and its customer. As a result of this post
balance sheet event, the client is now in default and the Group is
evaluating its options to recover amounts due to it through its
legal security and other such rights. Until this evaluation has
been completed, the Group cannot reasonably quantify any cash
shortfalls which could arise once better information is known.
Five-year summary (unaudited)
Restated Restated Total Total
2022 2021 2020 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Profit for the year
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Continuing operations
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Interest and similar income 203.0 163.9 173.1 191.4 169.2
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Interest expense and similar charges (50.4) (27.7) (39.4) (46.0) (35.5)
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Net interest income 152.6 136.2 133.7 145.4 133.7
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Net fee and commission income 17.0 12.7 10.8 20.1 17.9
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Operating income 169.6 148.9 144.5 165.5 151.6
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Net impairment charge on loans and
advances to customers (38.2) (5.0) (41.4) (32.6) (32.4)
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Gains/(losses) on modification of
financial assets 1.1 1.5 (3.1) - -
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Fair value losses on financial instruments (0.3) (0.1) - - -
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Operating expenses (93.2) (89.4) (81.8) (96.8) (84.5)
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Profit before income tax 39.0 55.9 18.2 36.1 34.7
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Discontinued operations
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Profit before income tax 5.0 0.1 0.9 - -
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Total profit before income tax 44.0 56.0 19.1 36.1 34.7
------------------------------------------- ----------- ----------- ----------- ------------ -----------
Continuing Continuing Continuing
2022 2021 2020 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------- ----------- ----------- ----------- ----------- -----------
Earnings per share for profit attributable
to the equity holders of the Company
during the year (pence per share)
------------------------------------------- ----------- ----------- ----------- ----------- -----------
Basic earnings per ordinary share 158.5 244.1 82.7 168.3 153.2
------------------------------------------- ----------- ----------- ----------- ----------- -----------
2022 2021 2020 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Financial position
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Cash and Bank of England reserve account 370.1 234.0 181.5 105.8 169.7
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Loans and advances to banks 50.5 52.0 63.3 48.4 44.8
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Debt securities - 25.0 - 25.0 149.7
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Loans and advances to customers 2,919.5 2,530.6 2,358.9 2,450.1 2,028.9
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Fair value adjustment for portfolio
hedged risk (32.0) (3.5) 5.7 (0.9) -
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 34.9 3.8 4.8 0.9 -
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Other assets 37.3 44.0 47.0 51.4 51.2
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Total assets 3,380.3 2,885.9 2,661.2 2,680.7 2,444.3
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Due to banks 400.5 390.8 276.4 308.5 263.5
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Deposits from customers 2,514.6 2,103.2 1,992.5 2,020.3 1,847.7
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Fair value adjustment for portfolio
hedged risk (23.0) (5.3) 4.7 (0.7) -
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 26.7 6.2 6.1 0.6 -
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Subordinated liabilities 51.1 50.9 50.8 50.6 50.4
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Other liabilities 83.5 37.7 63.1 49.4 45.6
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 326.9 302.4 267.6 252.0 237.1
----------------------------------------- ----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders'
equity 3,380.3 2,885.9 2,661.2 2,680.7 2,444.3
----------------------------------------- ----------- ----------- ----------- ----------- -----------
The 2021 and 2020 profits for the year have been restated to
reflect the disclosure of discontinued operations.
Appendix to the Annual Report (unaudited)
Key performance indicators and other alternative performance
measures
All key performance indicators are based on continuing
operations and continuing loans and advances to customers, unless
otherwise stated.
(i) Continuing loans and advances to customers
A reconciliation of total loans and advances to customers to
continuing operations loans and advances to customers is set out
below:
2022 2021 2020
GBPmillion GBPmillion GBPmillion
--------------------------------------------------- ----------- ----------- -----------
Loans and advances to customers 2,919.5 2,530.6 2,358.9
--------------------------------------------------- ----------- ----------- -----------
Assets held for sale - loan portfolios - 1.3 -
--------------------------------------------------- ----------- ----------- -----------
Total loans and advances to customers 2,919.5 2,531.9 2,358.9
--------------------------------------------------- ----------- ----------- -----------
Less discontinued loans and advances to customers:
--------------------------------------------------- ----------- ----------- -----------
Asset Finance (sold during 2021) - - (10.4)
--------------------------------------------------- ----------- ----------- -----------
DMS (sold during 2022) - (79.6) (81.8)
--------------------------------------------------- ----------- ----------- -----------
Consumer Mortgages (sold during 2021) - - (77.7)
--------------------------------------------------- ----------- ----------- -----------
Other - (1.3) (4.1)
--------------------------------------------------- ----------- ----------- -----------
Total discontinued operations loans and advances
to customers - (80.9) (174.0)
--------------------------------------------------- ----------- ----------- -----------
Continuing loans and advances to customers 2,919.5 2,451.0 2,184.9
--------------------------------------------------- ----------- ----------- -----------
(ii) Net interest margin ratio
Net interest margin is calculated as interest income and similar
income less interest expense and similar charges for the financial
year as a percentage of the average loan book. The calculation of
the average loan book is the average of the monthly balance of
loans and advances to customers, net of provisions, over 13
months:
2022 2021
GBPmillion GBPmillion
------------------------------------- ----------- -----------
Interest income and similar 203.0 163.9
------------------------------------- ----------- -----------
Interest expense and similar charges (50.4) (27.7)
------------------------------------- ----------- -----------
Net interest income 152.6 136.2
------------------------------------- ----------- -----------
Opening loan book 2,451.0 2,184.9
------------------------------------- ----------- -----------
Closing loan book 2,919.5 2,451.0
------------------------------------- ----------- -----------
Average loan book 2,699.3 2,240.5
------------------------------------- ----------- -----------
Net interest margin 5.7% 6.1%
------------------------------------- ----------- -----------
The net interest margin ratio measures the yield net of funding
costs of the loan book
(iii) Loans and advances to customers annual growth rate
Annual growth rate is calculated as the annualised growth in
loans and advances to customers based on the number of days in the
period since 31 December 2020:
2022 2021
GBPmillion GBPmillion
------------------------------------------------------- ----------- -----------
Loans and advances to customers as at 31 December 2,919.5 2,451.0
------------------------------------------------------- ----------- -----------
Loans and advances to customers as at 31 December 2020 2,184.9 2,184.9
------------------------------------------------------- ----------- -----------
Compound annual growth rate 15.6% 12.2%
------------------------------------------------------- ----------- -----------
The annual growth rate measures how quickly the loan book is
growing, measured against a 2020 benchmark.
(iv) Total return on average equity
Annualised return on average equity is calculated as the total
profit after tax for the previous 12 months as a percentage of
average equity. Average equity is calculated as the average of the
monthly equity balances.
2022 2021
GBPmillion GBPmillion
------------------------- ----------- -----------
Total profit after tax 33.7 45.6
------------------------- ----------- -----------
Opening equity 302.4 267.6
------------------------- ----------- -----------
Closing equity 326.9 302.4
------------------------- ----------- -----------
Average equity 313.7 287.0
------------------------- ----------- -----------
Return on average equity 10.7% 15.9%
------------------------- ----------- -----------
Return on average equity is a measure of the Group's ability to
generate profit from the equity available to it.
(v) Cost to income ratio
Cost to income ratio is calculated as operating expenses for the
financial year as a percentage of operating income for the
financial year:
2022 2021
GBPmillion GBPmillion
--------------------- ----------- -----------
Operating expenses 93.2 89.4
--------------------- ----------- -----------
Operating income 169.6 148.9
--------------------- ----------- -----------
Cost to income ratio 55.0% 60.0%
--------------------- ----------- -----------
The cost to income ratio measures how efficiently the Group is
utilising its cost base in producing income.
(vi) Cost of risk
Cost of risk is calculated as the total of the net impairment
charge on loans and advances to customers and gains and losses on
modification of financial assets for the financial year as a
percentage of the average loan book
2022 2021
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Net impairment charge on loans and advances to customers 38.2 5.0
--------------------------------------------------------- ----------- -----------
Gains on modification of financial assets (1.1) (1.5)
--------------------------------------------------------- ----------- -----------
Total 37.1 3.5
--------------------------------------------------------- ----------- -----------
Average loan book 2,699.3 2,240.5
--------------------------------------------------------- ----------- -----------
Cost of risk 1.4% 0.2%
--------------------------------------------------------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing the credit risk of its lending portfolios
(vii) Cost of funds
Cost of funds is calculated as the interest expense for the
financial year expressed as a percentage of average loan book
2022 2021
GBPmillion GBPmillion
------------------------------------- ----------- -----------
Interest expense and similar charges 50.4 27.7
------------------------------------- ----------- -----------
Average loan book 2,699.3 2,240.5
------------------------------------- ----------- -----------
Cost of funds 1.9% 1.2%
------------------------------------- ----------- -----------
The cost of funds measures the cost of money being lent to
customers.
(viii) Funding ratio and loan to deposit ratio
The funding ratio is calculated as the total funding at the
year-end, being the sum of deposits from customers, borrowings
under the Bank of England's liquidity support operations, Term
Funding Scheme with additional incentives for SMEs, Tier 2 capital
and equity, divided by total loans and advances to customers at the
year-end. The loans to deposit ratio is calculated as total loans
and advances to customers at the year-end divided by deposits from
customers at the year end:
2022 2021
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Deposits from customers 2,514.6 2,103.2
--------------------------------------------------------- ----------- -----------
Borrowings under the Bank of England's liquidity support
operations -
Term Funding Scheme with additional incentives for SMEs
(including accrued interest) 392.8 390.1
--------------------------------------------------------- ----------- -----------
Tier 2 capital (including accrued interest) 51.1 50.9
--------------------------------------------------------- ----------- -----------
Equity 326.9 302.4
--------------------------------------------------------- ----------- -----------
3,285.4 2,846.6
--------------------------------------------------------- ----------- -----------
Total loans and advances to customers 2,919.5 2,531.9
--------------------------------------------------------- ----------- -----------
Funding ratio 112.5% 112.4%
--------------------------------------------------------- ----------- -----------
Loan to deposit ratio 116.1% 120.4%
--------------------------------------------------------- ----------- -----------
The funding ratio and loan to deposit ratio measure the Group's
excess of funding which provides liquidity.
(ix) Profit before tax pre impairments
Profit before tax pre impairments is profit before tax,
excluding impairment charges and gains on modification of financial
assets.
2022 2021
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Profit before income tax 39.0 55.9
--------------------------------------------------------- ----------- -----------
Excluding:
--------------------------------------------------------- ----------- -----------
Net impairment charge on loans and advances to customers 38.2 5.0
--------------------------------------------------------- ----------- -----------
Gains on modification of financial assets (1.1) (1.5)
--------------------------------------------------------- ----------- -----------
Profit before tax pre impairments 76.1 59.4
--------------------------------------------------------- ----------- -----------
Profit before tax pre impairments measures the operational
performance of the business.
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END
FR MZGZFLLDGFZM
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